Billions of pounds have been lost in split capital investment trusts and it is small investors who have been hurt the most. The Money Programme tracked down the men responsible.
The stock market crash has left thousands out of pocket, but none more so than the investors who poured their life savings into split capital investment trusts.
At least £3bn has already been lost and angry investors are demanding compensation.
In 1999 Mary Mountain invested her life savings of £145,000 into zeros, a form of split capital investment which she believed would offer her good capital gain at a low risk.
"At my age I was thinking: I need to make provision should I have a stroke or have to go into a home. The money would provide the income for me to be able to afford that and hopefully leave something for my grandchildren."
But by March 2002 her original investment was worth just £72,000. Of the £25,000 that had been put into Aberdeen Asset Management's Leveraged Income Fund only £90 was left.
Split capital trusts are specialist funds which issue different types of shares offering different types of returns - investors can choose to buy capital shares, income shares or zeros, which promise a fixed level of capital growth but no dividend.
Aberdeen Asset Management
Aberdeen Asset Management is the UK's biggest split capital investment manager with responsibility for 19 split capital funds. The man in charge of Aberdeen's split cap funds was investment director Chris Fishwick.
In order to increase the amount each fund could invest in the stock market, Chris Fishwick oversaw a change in the way the investments were run, taking out bank loans to increase their stake.
Bob Champney of investment bank Merrill Lynch says the change made the funds much riskier for investors: "In a classic split capital investment trust the zero shareholder would have first call on the assets left in the pot when the fund matures. When you introduce bank debt into the split cap the bank then has first call on the assets in the pot and the zero shareholder is relegated to second place."
Sue Kennedy was advised to invest £30,000 in Aberdeen's Preferred Income Trust by the Lincolnshire branch of stockbrokers Brewin Dolphin. "They told me that the risk was minimal, and they told me they would produce assured capital growth irrespective of market conditions," she says.
But despite seeing her investment disappear, Brewin Dolphin has turned down Sue Kennedy's request for compensation and refused to comment on why they sold the fund as 'low risk'.
the magic circle
To make matter worse, several split cap funds began to invest in each other creating a complex maze of cross-investment known as the 'magic circle'.
According to David Hanratty from Nelson Money Managers, investors didn't know about the changes:
"Everybody in the financial community, to a greater or lesser extent, appreciated the problem. It was in the trade press, it was receiving some comment, but nobody tells the investor. The people whose money it is, the people who are actually need to be told, in order that they could make what would be some fairly life changing decisions, haven't got full possession of all the facts."
Retired farmer Ronnie Henderson invested £150,000 in Aberdeen's Preferred Income Trust opting to put his money into income shares rather than zeros. "I was prepared to take 'some risk' with my capital as the adverts worded it, in return for a reasonable income," says Henderson.
But by November 2001 his Aberdeen trust suspended its dividends and his retirement income vanished. Unknown to Ronnie Henderson, of the top twenty shareholdings in his trust no fewer than 17 were in other split capital trusts.
Last year, Merrill Lynch's Bob Champney set out to calculate how just how risky zeros in cross-invested trusts like Aberdeen's really were. After six months of struggling with the numbers Champney claims many of the zeros that were being sold as low risk were actually the reverse. In some very specific cases the market would have to rise by up to 700% for the investment to pay off.
Investors like Mary Mountain and Sue Kennedy have had no answers as to why their 'low risk' investments have completely disappeared and why the men paid to sell and manage their funds didn't tell them that the risks had changed.
The Financial Services Authority has launched an investigation into the scandal and a committee of MPs is demanding answers from Aberdeen Asset Management and other split cap investment managers.
But so far, the men behind the losses are staying silent.
This programme was first transmitted on Wednesday 16th October 2002. After this programme was recorded Chris Fishwick resigned from Aberdeen Asset Management.