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Don’t Say You Didn’t Hear it Here!

I’ve been writing about wine fraud quite a bit lately as a lot has been happening. And, a common thread through it all is that the people who were directly impacted by the fraud could have easily avoided it by just asking questions and being observant. After all, the Underground had been reporting on it for decades. This is really obvious from previous Underground articles such as “The Sordid Story Of Wine Manipulation & Wine Fraud Covering Over 40 Years Of Tasting Old Wines”  (To read that article click here [1]and the article just posted “The Two Faces of Fraud?” (To read that article click here [2]). And, now another thing that has been ticking away in the wine world has just completely blown up. The London Telegraph has just reported that massive fraud involving “wine investment firms” has surfaced. This happened almost simultaneously with the posting of the “The Two Faces of Fraud?” article.  Here’s what the London Telegraph had to say in an April 14, 2012 article:

“Investors lose millions in fine wine schemes.

Connoisseurs who sank their savings into fine wine have lost tens of millions of pounds after dozens of specialist investment firms collapsed

By David Barrett 

Liquidators have told the BBC [3] they have uncovered “colossal” mismanagement in a number of companies which offered members of the public a chance to make money by investing in luxury vintages. The schemes claimed to offer a higher yield at a time of underperforming stocks and low interest rates, but an estimated 50 wine investment companies have gone into liquidation in the last four years, leaving customers out of pocket.

Nadim Ailyan, an insolvency practitioner, told BBC Radio 4’s Money Box [4] programme his company had handled eight such cases.”There are certainly strong elements of mismanagement on a colossal scale,” he said. “I would estimate in the last four years there have been at least 50 such companies which have been dealt with by other insolvency firms. “Certainly tens of millions, potentially over £100 million, may have been lost.”

Some investors told the programme they had lost more than £100,000. One widow, identified only as Sarah, from the East Midlands, said she put £180,000 into a wine investment company after the death of her husband. She received certificates telling her that bottled wine had been bought and was being stored on her behalf in a bonded warehouse. But at the end of last year a brief letter informed her the company had gone into liquidation.”I feel ashamed that I put more money in than I should have done,” she said. Buying fine wine while still in the barrel – “en primeur” – means that investors can purchase the product far more cheaply than when bottled. But historically fraudsters have capitalised on people’s ignorance of the wine market to offer substandard products or – because of the delay between ordering and delivery – simply taken money without securing the product in return.

Last year Paul Craven, 39, of Woodside Court in Enfield, north London, was jailed for six years at St Alban’s Crown Court after fleecing investors of more than £1.25 million. Craven set up Bordeaux Wine Trading Company Ltd, in Potter’s Bar, and offered the opportunity to invest in en primeur vintages, but instead of purchasing the wine on behalf of customers the funds was used to fund extravagant lifestyles with two other fraudsters.”

So this fraud has been going on for 4 years in England and revolves around investing money with firms that were supposedly speculating on Bordeaux futures. Historically, Bordeaux wines have been sold to the trade while still in barrel. The wines are not delivered until about 2 years later. The combination of increasing world wide demand and some really good vintages resulted in a rapid escalation in prices beginning with the 2000 vintage. Buying “futures” became more than just collectors buying wines to cellar. Speculators, more interested in making money than drinking the wine, entered the market. Some of these were wine “investment firms.” The wine market expanded with these firms taking money from investors and charging the investors a fee for their investing in futures. No one ever intends to drink the wine. It is just a “flip.” This creates too much supply. This is how bubbles are created. And, bubbles always pop. It is just a question of time. And, that led me to be very suspect about new wine investors and new wine “investment firms.”

However, reading this article was the first time that I knew about the wine fraud in England. In this case, the firms apparently did not invest in anything, but just stole the money. But, I am not surprised. The “investors” were probably investing in something they knew very little about. They were interested in the promise of out sized returns at a time when returns in financial markets were poor. They also probably knew very little about the firms to whom they were giving their money. I would suspect that many of these wine “investment firms” were new and unknown like the one called “Bordeaux Wine Trading Company Ltd, in Potter’s Bar” that is described in the article. I would also bet that there were very few “investors” who bothered to verify any of the details. Things like where the money was deposited, receipts for the deposits, where, when, and for how much the wine futures were purchased, etc. If this information was not provided, or if all the information came direct from the investment firm, then that is a clear signal that something was very wrong. And, even though I do not know all the details here, it does look like the instances described in the article are out and out fraud, pure and simple.

However, the fraud issue aside I am skeptical of making money either in wine “investment trusts” or using leverage to build up a “wine investment” portfolio.  In my 12/30/11 article Happy New Year!, here is what I had to say about wine “Investment Trusts”: Wine ‘Investment Trusts’ will continue to be created. This will inevitably lead to a sharp correction as too much wine is accumulated, but this is unlikely until there are headline news articles on a regular basis about how investing in wine is a “no lose” proposition. This is not likely for several years. (To read the entire article click here [5] And, in my article on using bank loans to buy wine with the wine used as collateral, here is my conclusion based on the game in Asia: And the wine investment funds are just starting. Get on board! One manager predicts a 15% annual rate of return. At this rate, wine collector, investor, and speculator billionaires are just around the corner. But, hold on just a minute. What is this forecast based on and how much experience does the manager have? I’d say not much to both questions. But, maybe none of this makes a difference. After all, the government is supporting a market based on an arbitrary number value doled out by a person (or persons) trying to set standards for individual taste. What else do you need to know? For me, nothing. Caveat emptor. This is a train wreck!  (To read the entire article click here [6])

So, yet once again, forewarned is forearmed. Caveat emptor!

In Vino Veritas,Sig

John Tilson