Mr Noel Smyth, one of the larger shareholders in Real Estate Opportunities (REO), has complained to the Jersey Financial Services Authority about the property investment company's accounting policies.
The issue of how the company dealt with losses incurred when it broke an interest rate swap agreement was the subject of angry words between Mr Smyth, who owns around 10 per cent of the company, and one of the directors, Mr Richard Barrett, at the annual general meeting in Jersey last month.
Mr Smyth's advisers have now forwarded to the Jersey authority a copy of a report commissioned from a firm of independent accountants on the treatment of the loss.
REO is quoted in Dublin and London, but is registered in Jersey.
The swap related to a loan of €188 million taken out by the company in 2001. It was intended to fix the interest rate on the loan at 5.18 per cent until July 2008.
However, the bulk of the money, €173 million, was repaid in 2002, rendering the swap ineffective, according to the independent accountant's report.
The report argues that under various accounting conventions, the loss incurred on the swap, as a result of the early repayment of the underlying debt, should have been recognised in the company's accounts for 2002 because that was the year the debt repayments were made. It cites the treatment of a similar issue by Boots, the UK plc.
"We also consider that the remainder of the loss on the interest rate swap could have been recognised in the year ended December 31st, 2003 and that emerging best practice would support this treatment," according to the accountant's report.
REO chose to deal with the issue in a note to 2003 accounts. It said that the swap contract was broken on January 19th, 2004 at a cost of €15.3 million, when the remaining €15 million outstanding on the loan was repaid.
Recognising the losses as a cost in 2002 or 2003 would have severely dented the company's profits at a time when it was coming to term with catastrophic losses on its investment portfolio. REO recorded revenues before tax of £26.6 million sterling in 2002, but when the losses on its investments were taken into account, the loss for the year was £104.7 million.
In 2003 REO had revenues before tax of £21 million and a capital gain of £10.5 million, giving a return of £31.5 million.
A spokesman for the Jersey Financial Services refused to comment on the report. He said the authority had an ongoing investigation into the management of split capital trusts registered in Jersey.
REO was established in 2001 as a split capital trust with a significant portion of its assets invested in bonds and the remainder in property. The collapse in investment markets in 2001 and 2002 hit split capital funds hard and Aberdeen Asset Managers, which managed REO's investment portfolio and was a significant shareholder, is alleged to have colluded with other split capital trust managers to invest in each other's trusts to prop up their share prices.
A total of 21 investment firms, including Aberdeen, are being investigated by both the UK Financial Services Authority and its Jersey counterpart. REO plans to sue Aberdeen, and former British judge Lord Browne-Wilkinson has been hired by the company.
