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LM Investment goes under

Following hot on the heels of the collapse of Wickham Securities and Banksia Securities, comes the news that another mortgage fund has called in the administrators.

Gold Coast-based LM Investment Management was placed in voluntary administration yesterday, according to ABC News, placing the retirement savings of thousands of people at risk. Four of LM Investment’s mortgage funds had been frozen during the global financial crisis and were being wound up.

The news comes as the corporate watchdog, the Australian Securities and Investments Commission (ASIC) investigates LM Investment for potential multiple breaches of corporations law. The ABC’s Four Corners program ran an expose on the company earlier this month, airing evidence that the company claimed one of its main funds was a ‘bank-like’ facility and that it operated as a conservative and highly rated private bank.

LM Investment’s owner and chairman Peter Drake has reportedly told The Courier Mail, “I suppose on a global basis we are a small Macquarie Bank where we sell Australian products to the world”. I imagine Macquarie Group (ASX: MQG) wouldn’t be too impressed with that.

Following the closure of its failed funds, LM Investment turned to overseas and was heavily promoting its LM Managed Performance Fund. Despite the company’s claims that it had a diversified portfolio of assets, just one site, the 118 hectare Maddison Estate in the Gold Coast hinterland, makes up 62.5% of the assets of the fund. Interestingly the land was purchased for $89 million between 2007 and 2009, which independent valuers suggest at best, is now worth just half that.

Financial planners who recommended clients invest in LM Investment’s funds after receiving substantial commissions will be in the spotlight, as law firm Slater and Gordon (ASX: SGH) is preparing to take legal action against them.

Foolish takeaway

Many retail investors look set to lose thousands of dollars, and another collapse suggests that regulators need to do much more to protect investors in the ‘shadow banking’ sector. Foolish investors who may have invested in other mortgage funds may want to ‘reconsider’ those investments. The chances of doing your dough appear very high.

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More reading

The Motley Fool’s purpose is to help the world invest, better. Click here now for your free subscription to Take Stock, The Motley Fool’s free investing newsletter. Packed with stock ideas and investing advice, it is essential reading for anyone looking to build and grow their wealth in the years ahead.  This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson. Motley Fool writer/analyst Mike King doesn’t own shares in any companies mentioned.

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