vallierojas: FSA launches court action against Cavendish Moore

City firm Cavendish Moore investigated as part of a crackdown on landbanking

The newspaper adverts boasted of "potential returns of up to 50% in two years" and asked: "Can you afford to miss out?"

Plenty of investors decided this was a money-making opportunity that was too good to turn down, and put their cash into the development sites being marketed by UK land investment company, Cavendish Moore.

It is understood millions of pounds have been invested in 10 sites around the country in areas such as Nottingham, Swansea and Newcastle-under-Lyme in Staffordshire.

Is this an investment that's as safe as houses, or a house of cards that's about to tumble? Guardian Money can reveal that the Financial Services Authority is investigating Cavendish Moore, a related company, and three named individuals, because it suspects the firm may be operating an unauthorised "collective investment scheme".

We have seen correspondence revealing the FSA has also launched high court proceedings against the firms and individuals, and is "seeking various orders, including declaratory, injunctive and compensatory relief on behalf of investors". A high court hearing is due next month.

The FSA is engaged in a crackdown on unauthorised "landbanking" companies that buy up agricultural or other land without residential planning permission, divide it into small parcels, and sell these to investors. Purchasers are led to expect that their bit of farmland will get the go-ahead for housing development, which would see it explode in value.

Cavendish Moore ? which is contesting the FSA action ? claims its business model is very different. Its marketing material says this is all about investing in land that already has planning permission for homes.

The other big difference, it says, is that it organises the investors into limited liability partnerships (LLPs), where they are in control and make all the decisions. In other words, the company says, these are "property investment clubs" that are exempt from FSA regulation, rather than collective investment schemes.

It appears the FSA is not convinced by this argument ? hence its probe and legal action. The issue comes down to whether a club's investors/members have "day-to-day control" over how the land or property is managed. The FSA says that, in order for a property investment club not to be a collective investment scheme, every participating investor or member must have day-to-day control. If even one does not, "then the whole scheme could amount to a collective investment scheme".

We decided to look into the activities of Cavendish Moore, which has offices in Tring, Hertfordshire, and Royal Mint Court in the City of London, after being contacted by someone claiming to be "a concerned investor". This person told us: "They have taken millions from investors and are now being investigated by the FSA."

A browse around the company's website left us none the wiser, but it didn't take long to track down Cavendish Moore adverts that appeared in the Asian Voice newspaper earlier this year which claimed that UK land "has lost up to 70% of its value in the recession". They added: "You can invest in UK development sites from just �16,000! ? investing in land in the UK continues to prove highly profitable, especially when current market conditions make the entry level investment so attractive."

The company claims this is a low-risk opportunity because the land already has planning permission, so it is purely a case of getting the timing of the sale right to maximise the profits.

When we contacted Richard Leach, Cavendish Moore's company secretary, he told us there were about 10 property investment clubs up and running, and that the amounts invested varied between each project. He said the total invested across all the sites was several million pounds. "Cavendish Moore has voluntarily ceased this business model until this issue is resolved," Leach said.

A web search suggests that areas where the sites are located include Top Valley, Nottingham; the district of Mayhill in Swansea; New Houghton, Derbyshire; Newcastle-under-Lyme and Shirebrook, on the Derbyshire-Nottinghamshire border.

Leach added: "They [the FSA] understand our position and they have pointed out areas where they disagree. It's down to a technical argument as to whether it constitutes a property investment club or a collective investment scheme. This is about buying into land that has got either outline, or full, planning permission. Then, as a group, members decide what they want to do with it. With the property recession, most of them are saying [they want to] sit and hold."

Leach said the members are "entirely in the driving seat", and added: "There's quite a lot of physical evidence to show that members have voted and made decisions."

The FSA does not regulate land as an investment, but collective investment schemes ? including those involving land ? are subject to regulation.

A letter sent by the watchdog to one of the investors, and seen by Guardian Money, said it was investigating the firms and individuals "as there are circumstances suggesting to us that they may have been carrying on activities they should not conduct without our prior authorisation. The FSA is always concerned to receive reports that a person might be carrying on a regulated activity without FSA approval as there is an increased risk that the investor will suffer a loss".

The FSA has published guidance, which states that if a property investment club is judged to be a collective investment scheme, any individual operating it "must be an authorised or exempt person. If such a person was not authorised or exempt, he would be liable to commit a criminal offence". If a property club is a collective investment scheme, "it cannot escape the need for regulation by being dressed up as something else".

It seems it is now up to the courts to decide whether or not the FSA is right.

Rupert Jones