Suspended Dunlop Haywards valuer Ian “Flash” McGarry has been branded “dishonest” for his part in the alleged fraud of the Cheshire Building Society. But how did he get away with such “improbable” valuations?
He has been arrested, his assets have been seized, he has been called “negligent” and “dishonest” by a high court judge. And now he faces having to pay back millions of pounds lost in an apparent mortgage fraud, in which – according to the findings of a high court judge two weeks ago – he played a knowing part.
Over the past two years, Ian McGarry’s life has been turned upside down. In March 2006, when he was head of valuations for Dunlop Haywards, he was arrested and released without charge by police investigating a suspected mortgage fraud against Cheshire Building Society. He was also suspended from his job without pay.
McGarry has been caught up in a tangled web of strange valuations, mystery purchasers and nonsensical leases, at the centre of which is an uninspiring two-storey industrial building on the outskirts of Birmingham. During the high court trial on 18 January, it emerged that the building, the former Concentric Controls factory on Priory Road, Aston, was sold no fewer than four times over a two-year period, its price increasing to 10 times its original sale value.
Only now is it clear that the four purchasers who bought the building in such quick succession – Avocet Holdings, Valley Estates, Ascot Marketing and Goldgrade Properties – were all linked to each other and to Ahmed Afsal, a Birmingham property trader. And that false valuations by McGarry were being used to borrow far more money than the property was really worth.
Hot on the heels of the Priory Road fraud, a handful of other alleged mortgage frauds against lenders, including Nationwide, Barclays Bank and Société Générale, have come to light. All share a common factor, in that the properties were valued by McGarry and DH – now part of troubled property services firm Erinaceous, which is suing McGarry personally in an attempt to reclaim the cash it has lost.
Last year, high court judges labelled McGarry “negligent” in the valuations he provided, but it was not until a fortnight ago that Mr Justice David Steel said that McGarry’s actions had been “dishonest” and that he should be liable for the damages caused by them. McGarry’s employer, DH, will have to pay at least £10m, returning the money lent to a now-dissolved investment company based entirely on his valuation.
But how did McGarry, nicknamed “Flash” by his friends because of his love of fast cars, get himself into this position?
On 28 September 2004, McGarry unusually prepared not one but three valuations on the former Concentric Controls factory. The first valuation of the day was for Gibralter-based Avocet Holdings and was presented to lender Shaid Luqman’s Pearl Holdings – later renamed Lexi Holdings (Features, 26 January, p64).
The former factory had previously been sold to Birmingham-based property company Avocet Holdings by Concentric’s administrator, Grant Thornton, for £1.4m on 4 February 2004. But even so, only seven months later, McGarry signed off his first valuation for the former factory with a £10.5m price-tag for vacant possession value. McGarry stuck by his valuation, despite calls from Pearl several months later asking him to explain the difference between his value and the £1.4m sale price given by the administrator.
Pearl found it “improbable” that the administrator should sell the property so far below its £10.5m “true value”, and asked: “Can you account for the discrepancy between your valuation and the actual price?” McGarry offered no explanation, however, stating merely that he confirmed that his VP value was “in the region of £9m” along with the previous sale price of £1.4m. The Lexi loan never went ahead, and McGarry’s VP values for the property became even more erratic when he valued the same property three more times in 2005.
Hoodwinking the lenders
McGarry’s second and third valuations for the Priory Road property in September 2004 – one prepared for Avocet with Bank of Scotland as the lender, and one for investment company Valley Holdings with an unnamed lender – show how McGarry convinced the lenders of his overvaluations.
With these two valuation reports,McGarry also included a market value for the Priory Road property. He said that, with three new leases that were to be signedsimultaneously with the sale, the property would be worth £16m.
According to his report of September 2004 – which was later forwarded to the Cheshire for Goldgrade’s acquisition of Priory Road – the property was to be let to Birmingham-based manufacturer Euro Packaging, which would take 55,000 sq ft at £450,000 pa, engineering group Metsec plc, which had agreed to take 22,000 sq ft at £335,000 pa, and specialist floor manufacturer Polyfloor, which would lease theremaining space at £375,000 pa.
However, it later emerged that the leases were never signed by the companies he named in his report, and the building itself remained unlet.
Despite this, it was not until March 2005, when Goldgrade was trying to get funding from Cheshire for its acquisition of the former brassworks, that these apparent leases were finally scrutinised.
When Cheshire asked questions, including: “Why is Euro Packaging leasing such a large space for relatively little extra rent?” McGarry’s responses – according to Mr Justice Steel – made “no sense”.
His explanations included: “I understand from the borrower that this was partly good negotiation on the part of the tenant and partially because they are taking the multi-storey element of the building.”
However, even if there was no rental income attached to the upper floors of the building, Euro Packaging would still have been paying a rent of £9.74 per sq ft, compared with more than £13 per sq ft for the other two tenants.
To explain this, McGarry said that the other two lettings included yard areas that “had been rentalised”. But Cheshire was dubious, pointing out that £13 per sq ft still sounded a bit high. Further investigation has since found that the purported rents were up to 100% higher than those of the best new industrial space in the area.
McGarry’s response was that the rent was “reasonable” and equated to £5-£6 per sq ft if the yard areas were deducted. But this, said experts for Cheshire in court, meant that more than 40% of the overall rent was allocated to yard space, meaning that McGarry was still unable to offer a sensible explanation.
He was also, said Mr Justice Steel, unable or unwilling to point out or explain how securing these tenants would increase the property’s true VP value of £1.4m by 1,000%.
Mr Justice Steel added that it would also be “virtually inconceivable” that, alongside paying the massive rents, the three alleged tenants would all agree to take 20-year leases with no breaks and to “put and keep” the dilapidated property in good repair.
“These features of the valuation are only consistent with dishonesty,” ruled Mr Justice Steel. “Even incompetence cannot account for the purported acceptance of the terms of the lease and the valuations based upon them.”
Nevertheless, convinced by McGarry’s arguments at the time, Cheshire handed over £10.5m to Birmingham-based Goldgrade as a loan on the property in April 2005 and, in September that year, even increased the loan by a further £1m based on another of McGarry’s desktop valuations. Goldgrade made three interest payments before defaulting. However, it was not until an anonymous phone tip the following February that Cheshire began to investigate the transactions as potentially fraudulent.
In the high court last month, McGarry made no defence against any of the allegations against him on the grounds that this could affect a possible criminal investigation being undertaken by the Serious Fraud Office. And when Mr Justice Steel asked him to give some idea of what his defence might be, his answer was: “My defence will revolve around the argument that I was not the head of valuations at the time or the head of the office at the time that this valuation was undertaken, and I was instructed by my superiors to overvalue a previous property on behalf of the same borrowers that this case relates.”
The defence that he knowingly overvalued these properties because his superiors told him to do so did not wash with Mr Justice Steel. He said it was “obvious” that Cheshire was the object of a mortgage fraud by those controlling Goldgrade, but dismissed the idea that McGarry was also duped by the fraudsters or that he was “merely a negligent tool to their scheme”.
As an experienced surveyor who qualified in 1996, McGarry should not be given the benefit of a 750% margin of error on the true vacant possession value (£1.4m) of the Priory Road property, he said. In fact,McGarry had “no realistic defence”.
