The following is one of many cases we have been involved in where our independent expert report assisted the court in resolving the issues of the case. See Frauenstein v Farinha (2007) FCA 1953.
In simplistic terms, ‘A’ had been approached by a friend to invest in three businesses. Monies were handed over and ‘A’ was told they would be used for certain purchases. No management agreements were in place, no banking facilities were in place. ‘B’ deposited much of the funds into their own account with the promise that they would be accounted for correctly. ‘A’ had at times also paid some creditors directly.
Eventually, as things began to unfold and more and more monies were required, ‘A’ was provided with budgets and accounts which did not make sense to him. Our investigations revealed the following.
- The budgets and accounting for monies were incorrect.
- The accountants had failed to account for the monies as intended, ie the wrong businesses were credited for the monies lent.
- The effect of this was to divert loans away from the most profitable business to the least profitable business where it was likely that the business would fail and monies would be unrecoverable.
- Loan funds were converted to equity. This was to give the appearance that the monies were not loans and were therefore unrecoverable.
- Monies were directed and used for purposes other than that intended.