How not to be robbed by the wine spivs
Jim Budd warns investors that their hopes of vintage gains may end up corked, leaving them with a nasty taste in the cellar and the wallet Nvine investment sounds so enticing, especially when the stock market is more like a rollercoaster ride. The attraction of owning a few cases of some of the world's most expensive and sought-after wines, and waiting for them to make you a 'tax-free profit' while stored in a temperature-controlled bonded warehouse, is obvious.
But be warned: the attraction is also clear to a goodly number of confidence tricksters, who since the early 1990s have been relieving gullible investors of their savings by persuading them to invest in either nearly worthless whisky and champagne or grossly overpriced cases of red Bordeaux. For the perpetrators these are virtually risk-free scams. Although the DTI has shut down 15 claret-investment companies since 1998, only four drinksinvestment fraudsters have so far been prosecuted and jailed.
There are a number of telltale signs. Watch out for unsolicited letters offering a free confidential report on a company in which you hold shares. Also, for glossy but vacuous brochures quoting auction prices on ultra rare wines such as Château Lafite 1797; persistent and long phone calls as the boilerroom boys try desperately to persuade you to buy and so earn enough commission to pay for their expensive clothes and flashy cars; claims that wine is unaffected by economic trends. This is obvious nonsense. If you hit hard times, you continue to buy bread but not fine wine. Be wary of anyone who spouts financial jargon. as many of the scarnsters come from the more exotic reaches of the financial world and have little or no experience of the fine-wine trade.
Unfortunately, a number of journalists have carelessly repeated generalised and misleading statistics that show wine investment to be more lucrative than it really is. 'Between 1995 and 2000 the value of the top 600 Bordeaux wines rose by 300 per cent' is a favourite quote. But there is no index of the top 600 Bordeaux wines, nor did they rise in value by anything approaching 300 per cent. Decanter magazine's Bordeaux Index is based on auction prices. The Index has risen just 14.48 points since December 1996, when it was reset at 100.
Investing in fine wine is not like buying stocks and shares. There is no set market price. Just a cursory look at www.wine
searcher.com, a very useful site that gives prices of fine wine around the world, will show that there can be a big variation in the price of the same wine even from legitimate brokers. Anyone considering wine investment should first invest a modest $24.95 for a year's subscription to the pro. version of wine-searcher that lets you check how a wine's price has moved over the past four years.
Furthermore, wine, like other alternative investments, does not come under the remit of the Financial Services Authority, so anyone can set up a wine-investment company, irrespective of whether they have the necessary experience or are fit to run such a company. Frederick Achom and Anthony Grant set up Boington & Fredericks Ltd while awaiting trial for fraud. Convicted in September 2000, they spent seven months in jail and then activated the company in March 2001. It was closed in the public interest by the DTI in November 2001. In our topsy-turvy system it is down to the DTI to prove that these companies are unfit.
Beware the up-front commission. Some companies charge an up-front commission — typically 25 per cent but it can be as high as 50 per cent — and then do not charge a commission on the selling price. Morgan Aston Ford Ltd, based in Greenwich, openly declares the 25 per cent commission it charges. Although I can understand why an immediate 25 per cent commission is an attractive proposition for companies such as Morgan Aston Ford or Bordeaux Wine Consultants Ltd, I am at a loss to understand why this charge benefits the investor. Wine is generally a mediumto long-term investment, so there is no guarantee that the company, however legitimate, will still be in business when you want to sell. It makes much more sense to buy from a broker who doesn't charge an up-front commission but does charge one when you want to sell. This is now about 10 per cent, although International Fine Wines Ltd is at present charging only 7.5 per cent.
Nor, for that matter, is wine necessarily the tax-free investment it is often claimed to be. The claim rests on the notion that wine is a 'wasting asset' because it is not expected to last 50 years. This is true for most wines — Chilean Merlot and honest but ordinary claret — but not for wines that are reasonable bets for investment. As the 'wasting' period of 50 years is calculated from the time of purchase, recent Bordeaux vintages such as the much-lauded 2000 may well attract capital gains, as there will surely still be some bottles of this vintage around in 50 years' time. Also, anyone regularly trading in wine will be liable to pay income tax on the profits.
Over the past ten years. UK-based drinks investment scams may have turned over some £120 million, but they have been dwarfed by Seed International Ltd. This Cayman Islands-based company persuaded a group of American doctors to send deposits of between $130 and $160 million on wine that was said to have a fully paid-up value of more than $500 million. However, it is highly likely that Seed only owned or held title to wine worth less than £5 million. Gullible doctors were sold claret at hugely inflated prices and then told they had made big profits, often 30 per cent or more, in only a few months and so were persuaded to send still more money. A few sent more than $1 million. Paul Freeman, the head of Seed International and once of Peterborough, now lives close to the waterfront in Monaco. His view must be entirely unencumbered by any yachts belonging to his unfortunate clients.
Over the years the Seed International group hired a number of consultants, including the Pelican Partnership, exGuinness boss Ernest Saunders, chartered accountants Gerald Edelman, and distinguished law firms such as Richards Butler and D.J. Freeman (now Kendall Freeman). Seed International is now being investigated by the FBI, the Dutch police and tax authorities; three American states have issued cease-and-desist orders against them and more may follow.