KEY POINTS:
A frozen mortgage investment fund that investors were told had to be closed because of market conditions may in fact have been the victim of mortgage fraud.
The Serious Fraud Office is investigating a group of 16 loans worth $33 million in the $242 million Tower MortgagePlus Fund, after they all defaulted on payments at the same time in late 2007. Another group of 12 loans worth $18 million is not in default but is understood to be connected to the same group of borrowers.
Together the loans make up over 21 per cent of the Tower MortgagePlus Fund's total value.
The fund was frozen last April, the first New Zealand mortgage investment to face this fate.
Administrator and promoter of the fund, Tower, said increased competition from banks and greater uncertainty in the property market had forced the closure. It said that of the fund's 450 mortgages, 9.1 per cent were then in arrears by more than a month.
The fund was set up and managed by trust company Trustees Executors, which is chaired by former Prime Minister Jim Bolger. The Herald understands that in early 2008 Trustees Executors called in forensic accountants to investigate. It emerged that the loans in default plus the other 12 could all be traced back to the same borrowers and property professionals.
The Herald understands the accountants' report concluded that Trustees Executors' staff were probably not involved in the alleged fraud, but was highly critical of the company's loan approval and management functions. It's understood Tower conducted its own inquiries. Since the closure, it has returned about 40 per cent of investors' money in the fund.
Executive director of Trustees Executors Deepak Gupta confirmed the SFO investigation. He said that after the 2007 defaults the company decided to freeze the troublesome loans and inform the SFO.
"The fund, and its investors, were not affected nor at risk from the loans in question, because ... arrangements were made by Trustees Executors Holdings to underwrite the loans in question pending full investigation and resolution of the matter," he wrote in an email.
When contacted by phone yesterday, Mr Bolger refused to comment. Mr Gupta said investors were told about the situation surrounding the loans in February 2008, via an amendment to the MortgagePlus fund's prospectus.
The amendment says TE Holdings "has agreed to make the fund whole for any loss of value in capital and interest ... for 16 loans that are currently in default ... and 12 other loans".
The amendment makes no mention of the alleged fraud.
Sources say allegations include claims that apartments were represented as commercial premises, and that values of properties were inflated.
INVESTMENT INVESTIGATION
* The $242 million Tower MortgagePlus Fund was frozen last April.
* Investors were told the closure was due to market conditions.
* Now the Serious Fraud Office is investigating a clutch of the mortgages.
* The 16 loans, plus another related group of 12, make up 21 per cent of the fund's total value.
