Warning on high return investments
Thursday, November 22, 2007/
Be wary of investments promising high returns, ASIC warns this morning after moving to wind up a finance company. ASIC obtained orders in the Federal Court of Australia to wind up Geelong-based finance company, Caveat Finance on grounds of insolvency.
The company, which started in 2005 provided high interest short term loans (usually one to four months duration) to clients in the business sector. The interest on the loans was 5% per month (60% a year) with penalty rates often up to 10% per month.
To finance these loans, Caveat borrowed money from private lenders, some of whom were invited to loan money to Caveat via the company’s web site.
Private lenders were lured with the promise of interest rates of 2% a month (24% a year).
ASIC alleges that in borrowing money from private lenders, Caveat contravened the law by issuing debentures without entering into a trust deed or appointing a trustee for the debenture holders. Evidence before the court shows there is in excess of $3.7 million outstanding to debenture holders and there is a serious risk the loans will not be repaid.
ASIC’s executive director of enforcement, Jan Redfern, says investors need to be wary of any investments promising high returns.
“Some investors mistakenly believe debentures are fixed term deposits with banks except with higher interest rates. Unfortunately what some investors don’t realise is that investments offering high returns generally come with high risks,” she says.