According to an investigative report by Regulation Asia, 65 out of 120 investors committed about US$48 million to GMF (Global Merchant Funding) via loan notes. The notes offered guaranteed annual returns of 8 per cent to 14 per cent. Investors came from Hong Kong, UK among other countries.

Another group of investors put up to US$10 million into P2P mortgage lender GMF Finance.

They, too, also contacted police with similar allegations of misappropriated funds. Some of the investors are prominent bankers.

Both companies operated as subsidiaries of Singapore-based GMF Group Holdings, whose directors are Richard Grainger, Avery Stone and Simon Zoen. Grainger and Stone were both living in Hong Kong at the time the companies failed.

Avery Stone used to be an executive at MasterCard Worldwide. He is also a former board member at the Hong Kong American Club. According to investors he met several investors through the club’s social activities. Richard Grainger is a former director of debt capital markets at Barclays.

Shareholders and forensic accountants are currently investigating the two companies and they have been unable to contact Grainger and Stone since early this year. Directors of the company did not respond to e-mail queries by Regulation Asia.

GMF, which operated in Hong Kong, Taiwan and Singapore entered into voluntary insolvency in April this year. Their business offered cash advances to merchants in exchange for taking a commission based on their credit card receivables.

According to a member of the investor group, GMF stated it would restrict average cash advances to between US$20,000 and US$30,000, and never exceeding US$50,000. After 2010, GMF reported non-performing loans of less than 6 per cent.

However, the investors and accountants later discovered advances by GMF of about US$7 million each to two companies and US$5 million to another company. All three companies were later liquidated. The investors allege a GMF Group Holdings director was on the board of two of the three companies.

The investors say the company, which was founded in 2008 and claimed at one point to have 1,200 clients, was effectively insolvent for several years prior to actually entering liquidation. In 2014, according to another document, GMF made a net loss of US$15.91 million.

The document also said GMF would begin new loan note programmes on 29 February and 15 March, with guaranteed returns ranging from 9 per cent per annum on investments held for three months to 16 per cent for a 36-month-term note.

The SCMP reported in 2012 that GMF was accused of breaching the Money Lenders Ordinance by carrying on a business as an unlicensed money lender.

GMF was acquitted when it successfully argued that it only provided cash advances rather than loans. It was also awarded US$290,000 in damages.

An appeal was dismissed in April this year. Retail and banking sector analysts said the trial was a test case that could radically alter lending practises and regulation in Hong Kong.

It is not what you say that counts. It is what investors want to hear.

Since the financial crisis there has been a profound disconnect between clients and their financial advisers as investors are starving for investment yield. It has been so difficult to generate income from a portfolio that investors are desperate for any opportunity.

All investors ever paid attention to were the attractive, guaranteed yields. No one thought about the risks needed to achieve them. That leads to undisciplined and disastrous decisions.

GMF and its directors have not yet been charged. Whether or not the directors conspired to misappropriate funds or a series of bad lending decisions transpired into an irreversible business failure is not as important as what led to the investment decisions in the first place.

These kind of lending operations- whether or not they are Ponzi schemes, represent the shadowy, non-traditional banking world of Hong Kong consumer and small business finance companies.

As a risk class they tend to make excess returns when the general economy is doing well and then they fail miserably altogether when the economy turns down.

They claim they are diversified across numerous small businesses, but this kind of diversification is an illusion because all of them are heavily tied to the same, highly correlated economics.

Peter Guy, a former international bankers, is also co-founder and editor-in-chief of Regulation Asia