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How a German 'pyramid scheme' fooled investors

Arthur Sullivan
May 5, 2021

A German property group has gone bust, with indications it was a seriously fraudulent enterprise. Although nowhere near as known as the Wirecard scandal, the case is arguably far more consequential for ordinary people.

Dolphin Trust founder Charles Smethurst (right) with his wife Kerstin Manuela Lenz
Dolphin Trust founder Charles Smethurst (right) juggled with money that belonged to ordinary peopleImage: Christina Katz/Eibner/imago images

When it comes to German corporate fraud, Wirecard has been hogging the headlines for a while.

But there's another German company that has plummeted to Earth after a more than €1 billion hole emerged in its accounts. Except unlike with Wirecard, this was money that once actually existed and which belonged to ordinary people.

The tale of Dolphin Trust, in more recent times known as German Property Group, is a cautionary one.

A property investment company based in Hanover, for years Dolphin Trust benefited from a shiny image that presented it as both a safe and profitable choice for those looking for alternatives to banks as places to put their money.

Dolphin Trust's pitch was as follows: Using investors' money, they would buy old buildings in Germany at knockdown prices and then renovate them into high-end apartments. Proceeds from the sales of these apartments would then go back to the investors, netting them tidy profits.

Little known in Germany, Dolphin Trust targeted customers in the UK, Ireland and several Asian countries including South Korea and Singapore. It was sold as a canny investment choice by several financial advisors in those countries.

Dolphin Trust headquartersin Hanover
German Property Group, formerly known as Dolphin Trust, has filed for bankruptcyImage: Alexander Koerner/Getty Images

But in July 2020, the company filed for insolvency in Bremen, with debts estimated between €1.2 billion ($1.4 billion) and €1.5 billion. A month later, German prosecutors began a criminal investigation into suspected fraud. What for years looked like a respectable investment vehicle now bears the hallmarks of a pyramid or Ponzi scheme.

The rise of Dolphin Trust

Dolphin Capital was founded as a merger of several companies in 2008 by a German-British man called Charles Smethurst. It changed its name to Dolphin Trust in 2014.

In its early days, the company did make some payouts to investors. But for much of the last decade, the reality behind the polished corporate sheen was that the company was doing little other than buying properties with other people's money and leaving them untouched thereafter.

The company hasn't filed accounts since 2015, but the first public signs that it was in serious trouble came in May 2019, just a month after it changed its name to German Property Group, complete with its own YouTube "news" channel.

In May 2019, the BBC consumer affairs show You and Yours spoke to several people who had invested in Dolphin Trust but had received no money back, nor any information as to the state of their investments.

At the time, Dolphin Trust said investors' money was safe and that even if buildings were not successfully redeveloped and sold, investors were guaranteed to recoup their original investment as they had a stake in the purchased building.

Falling into ruin

The company rumbled on but its reputation became ruined as thousands of investors around the world began to realize that the money they had invested — often relatively small amounts but of huge significance to them personally — was gone.

Brewery in Bad Aibling, Bavaria
Dolphin Trust bought this former brewery in Bad Aibling, Bavaria, five years ago. It is falling into disrepairImage: RTÉ

When the company entered bankruptcy last year, a document filed to the court revealed that the group held around 70 properties, the majority of which were not being developed — and with many in various states of disrepair.

In 2019, Ludwig Wallinger, the mayor of the small German town of Schonthal near the Czech border spoke to the BBC about an old monastery Dolphin Trust had purchased in the town in 2017.

"The last time I heard from anyone was in spring 2018, when they asked me what I thought they could do with it," he said. "They suggested perhaps luxury apartments, to which I laughed, because this area just does not have the market for upmarket flats."

In April this year, a report by the television program Prime Time for the Irish national broadcaster RTE detailed the huge scale of damage done to Irish investors by Dolphin Trust, with just under 2,000 people owed around €200 million by the bust company.

RTE spoke to Stephan Schlier, the mayor of the Bavarian town of Bad Aibling, where Dolphin Trust bought an old brewery, long since left to the elements.

"We are angry, very clearly. The building in this condition does not suit Bad Aibling," he told the program "Dolphin don't want to develop anything."

Stephan Schlier, mayor of Bad Aibling
Aibling Mayor Stephan Schlier says residents are angry at the state the Dolphin Trust's inaction has left the old brewery inImage: RTÉ

RTE also spoke to two independent German valuers about the property, both of whom said the brewery was worth no more than the original €5.6 million Dolphin had paid for it.

'Pyramid scheme'

The properties still owned by the company at the time of bankruptcy are estimated to be worth no more than €150 million collectively. With at least €1.2 billion owed to investors, and possibly much more, there is no hope of those people getting their money back.

Gerrit Hoelzle, an insolvency administrator who first dealt with the case, said in 2020: "The originally pursued business model collapsed years ago. Obviously as a result of the increasing financial shortage, the business model, which was initially focused on real estate transactions, gradually developed into a pyramid scheme."

Justus von Buchwalt, an insolvency administrator working on the case, told RTE for its recent report: "There are strong indications that Dolphin Trust was a pyramid scheme."

The investigation is continuing. In March, Smethurst's home was raided by police, who seized computer servers and files. Finding out exactly what happened to all the money will be a complicated task, although it is clear that Smethurst's wife, Kerstin Manuela Lenz (pictured at the top of the article, left), directly benefited, having been loaned several million by the company over the years.

The case is shining another unwelcome light on Germany's corporate sector and, in particular, its financial and corporate regulators, so battered by Wirecard and other recent scandals.

Financial advisers in Ireland, the UK and elsewhere are also facing heavy scrutiny for selling Dolphin Trust as an investment for so long.

But Dolphin Trust's long-established pitch had traded on the idea of Germany itself as a paragon of economic virtue and prudence. Cloaked under this apparently respectable cover, Dolphin Trust — like Wirecard — was able to hide its sins in plain sight.