Mediated by Swedbank, over 200 Estonians invested a total of €8.5m into Romanian real estate. By today, their money is no more.
In 2007, Peep Aaviksoo’s company IPC Romanian Land Portfolio OÜ (later renamed to be Nord Hill Land Portfolio) borrowed a bit under €8.5m from more than two hundred creditors. The loan was to purchase real estate in Romania, to afterwards make money on price rise. The lenders featured people well and less known.
«Inflation was strong and everybody was saying that money was losing value. I had money left over and knew not how to invest it,» relates singer Kersti Madis who invested €50,000 left over from selling a house (in Estonian kroons, back then) into this very fund related to Romania.
«I showed up and was told that the these were the final few days that the fund was open, and if I did not decide at once I would no longer be able to invest there,» says the lady who met the funds then manager Siret Soom to have the talk.
Actually, Ms Madis wanted to invest less than what she had, but was told that an investment below €50,000 was out of the question. As it afterwards surfaced, with a little help from Swedbank some of the investors had escaped the requirement.
«I was stupid, sure, to have dared to place all my money there, but such were the times. A real estate boom had occurred, and the promised profit looked realistic,» notes the lady. The ten years saga has been a pain. «Big businessmen will probably get over it, but not me. For me, these were my life’s savings,» she says.
Back then, Peep Aaviksoo enjoyed an excellent reputation. His dignified image was supported by executive management skills at major Estonian companies like Norma and EMT. On top of that, he was Romanian honorary consul and brother to then defence minister Jaak Aaviksoo.
At the moment, bankrupt as a private person, Peep Aaviksoo teaches at Estonian Business School. According to a source seeking anonymity, loans to the firm of Mr Aaviksoo were supported by his previous success story in Romania yielding a whopping 60 percent profit. On the new folder, this was also advertised as lure.
According to sources who bought the bonds, the trust was the deeper as these were mediated by Estonia’s largest bank Swedbank which assured them this was a safe and good investment into real estate through which it was hard to lose money. The investors were told that the plots in Romania had been selected with care, and at prime locations.
«They told me about crushed stone plants, showed me pictures of new cottage quarters. Everything felt so trustworthy,» recalls Kersti Madis, looking back to the act of investment.
«As it emerged afterwards, these were but no-good wastelands,» says a well known businessman preferring not to be named. «Some hill slopes and improvised landfills where construction will probably never happen.»
The public figure adds that, in Romania, altering the intended purpose of farmland is very complicated and the land was probably purchased at ten times the price.
For this very reason, Mr Aaviksoo’s IPC Romanian Land Portfolio was unable in 2011 to pay investors back the money borrowed. At the moment, the company is basically bankrupt and under police investigation.
Investors say IPC Romanian Land Portfolio would never have gotten the money without Swedbank’s help. «Turns out, to its best clients Swedbank sold its greatest asset which is trust,» says another investor asking anonymity, having lost an investment of over €60,000. Having searched the matter, he knows that the bonds programme was advised by Swedbank jurists and interest product department.
To avoid surveillance by Estonia’s Financial Supervision Authority, the bonds issue was closed – as assured in the emissions prospectus also mediated by Swedbank.
Closed issues are first and foremost for professional investors who know how to assess risks. The investments need to be at least €50,000 per investor and there may not be more investors than 99.
IPC Romanian Land Portfolio OÜ and Swedbank have sneaked around public bond issue requirements by Swedbank initially purchasing over 40 percent of its volume for its clients. Most of the bondholders have invested less than €50,000 and they number over 200 which corresponds to public issue requirements.
Several investors ended up as bondholders basically without their knowledge. Namely, Swedbank’s private banking asset management unit offers asset management services to wealthier customers.
«I do not remember if the bank called me on the phone or not. Suddenly, glancing at my securities account, I discovered I had also invested into Romania. The bank probably had the right to do deals in my name,» says an investor who says he has written the €50,000 off. His story is also confirmed by other very well known businessmen, who desire not to publicly go against Swedbank.
The company isn’t bankrupt as yet, but several investors intend to file for that. Few believe they could get their money back. Mainly, they wish to see where the money moved.
«As the real estate crisis hit, I sensed things might be bad with the fund,» says Kersti Madis. «But I was served coffee again and told all was okay. The manager of the company was constantly travelling, in Romania, in Holland... Meanwhile, I was wondering how the fund could do well after the entire world economy collapsed.»
She goes on to say: «They just kept beating about the bush. Did not answer e-mails and calls. One could feel something wasn’t right!»
As the bonds proved impossible to redeem in 2011, an investor suggested at a meeting chaired by Mr Aaviksoo to let the company go bankrupt. «As this one lady burst hysterically weeping at the meeting, I realised that people had been involved for whom these were their last savings,» relates the investor, asking for anonymity.
His proposal regarding bankruptcy went unheeded. Instead, the redemption date was expended till March this year.
To finance running costs of the company, €230,000 were borrowed at yearly interest of 30 percent from the company linked to Madis Habakuk – one of the investors. As security, the lender lead by Mr Habakuk wanted a mortgage of €1.2m set to the plots most valuable, which is about a half of the area of the real estate and 70 percent of its value. Swedbank’s representative in the company’s council voted yes.
Importantly, Swedbank has always had a representative in the council of the company. Currently, IPC Romanian Land Portfolio OÜ desires to capitalise the interests of the old loan, but over the years the €230,000 interest has grown into €430,000.
Also, the company’s council wants a couple of hundreds of euros to continue. Swedbank itself is unwilling to lend money again. Filing for bankruptcy is not allowed, but the delay comes with a hazard: the deals done years ago begin to expire, and cannot be reversed anymore.
«Getting no answers from managers of the company, I went to Swedbank and desired to contact Swedbank’s representative in the fund,» says Kersti Madis who invested the house-sale savings. «I was asked questions and they did not want to tell me who in the bank was dealing with the fund. Finally they gave me the e-mail address of some third person who sat in the company’s board, but had nothing to do with Swedbank.»
Swedbank: we did not organise the bonds issue
All Nord Hill Land Portfolio bonds involved were subscribed for clients of the bank, the bank did not subscribe for bonds for itself. We had no contractual relationship to organise the issues not for the counselling of companies related to issuer – thus, Swedbank Markets assumed no role as organiser or coordinator.
The bank subscribed for Nord Hill Land Portfolio bonds within portfolio management service which is summarised as one investment. As the summarised investment exceeded €50,000, while distributing the bonds between clients each portfolio could include a sum under €50,000. To our knowledge, the bond issues in 2007 by Nord Hill Land Portfolio were not public.
With the case at hand, one must first consider the overall economic context back then, and the market practice. Due to the market situation in 2007, investments – regarding which both institutional and private investors would probably be much more cautious today – attracted lots of interest. As the former undertakings of said company had been very fruitful for investors, and the market practice supportive, after a thorough analysis we also opted to participate in the Nord Hill issue.
In our dealings, we adhered to practice and legislation valid at the time of the issues. When analysing conditions of investments, we always go by the interests of our clients and the desire to protect their rights in every situation. We are only willing to forward information to our clients if the conditions are assessed good enough for investors.
Naturally, the global financial crisis and its effects have been a good lesson for the bank as well, wherefore we have been much more vigilant regarding new investments mediated to our clients, and are even more thorough while reviewing them before taking a decision.
Our employees analysed the issues and brought out their risky aspects – this was the custom practice then as it is now. We appreciate long-term customer relations and take steps needed to protect their interests – we represent our asset management clients in the council of the company, thus our representative is in the council as related to his job. Within portfolio management service, the bank asks no directions from clients and gives then no advice.
When it comes to lending, two roles need to be distinguished: the bank as provider of portfolio management service, and the bank as a financer; the first role cannot and may not affect decisions of the second role. It is also important to realise than for a company with liquidity problems and only able to offer security located abroad, it is very complicated if not impossible to borrow money at good conditions. As the investors opted to extend maturity of the bonds, the best available loan offer had to be chosen. To our best knowledge, the then manager of the company offered all investors the opportunity to participate in proposing a loan, at equal conditions.
We assumed the bonds issue was not public
Andre Nõmm, Financial Supervision Authority board member
Nord Hill Land Portfolio OÜ bonds issue was not registered at Financial Supervision Authority as public, and we have hitherto gone by that assumption. We have also assumed that Swedbank, as a professional credit institution would know and apply current law.
Having acquired a mandate from a client, a credit institution should act in the best interests of the client while avoiding and managing conflict of interests. In case of conflict of interests, a credit institution in the position of trust is generally expected to apply self-denial i.e. try to prefer best interests of client. Without placing this specifically in the context of the Nord Hill Land Portfolio OÜ case, let us note that in 2009 and from here Financial Supervision Authority was, in various procedures, involved in assessment to solutions by banks were management of conflict of interests was expected. After said period of time, credit institutions have substantially developed their solutions, as well as making additional investments into compliance-check function.
Toomas Savi, former politician
I’d rather not say how I happened to be involved. The investment was a two-part project. As the earlier investment into Romania had been very good, therefore I also invested into the next one. I would not like to comment any further, but regarding getting the money back I am very sceptical.
Monika Lepistu, entrepreneur
I do not remember how exactly I became owner of the bonds. I was involved with bonds at the time and I also had others. As things begun to go awry, I stopped going to the meetings. I was not having much say regarding the problems, feeling I was a minor investor who happened to be there via my company. When loans begun to be extended to the company at exceedingly high rates, at some point I sensed nothing would come out of it. In hindsight, I’m sorry of course that we invested there, but we make our decisions in the moment at hand. The brochures were very glossy, you see, the CEO was a man of a very trustworthy reputation, the earlier fund had done very well. Probably, a lesson to me and the other investors. The fund carries this awful rotten stench and thanks a lot to the newspaper for digging into the abscess.
Urmas Kaarlep, auditor
I had my securities account at Swedbank, but I invested at my own initiative knowing the fund managers. Siret Soom worked at PriceWaterHouseCooper, and I also knew Peep Aaviksoo. Before this investment, there was a plot in Bucharest where we got the money back. As the 2008 events happened in the fund, I realised there was no hope of getting anything back. It was obvious from the start that this investment was not risk-free, but regarding supervision of the company I cannot have a say as I was not present. At a subjective glance, I am not satisfied that the company has large loans and is essentially bankrupt.
Elmo Sarapuu, founder of Auto 24
It was us who invested and therefore it is hard to point a finger. This is a project that we have now written off. For us, this was not the last money...
Martin Sööt, a Tartu entrepreneur
For me, the investment decision was made by Swedbank’s asset management. If an investment has not yielded anything and is in the red, it surely cannot be called a good investment. I have personally not delved into it, as I trusted Swedbank to place and to invest my money.