Cross-referencing what may be a Ruby Con

Is it ruby-red faces all round at Wrekin Construction or might one or two complexions have taken on an ashen pallor as it emerges that the company’s £11m valuation of the now infamous “Gem of Tanzania” is based on forged certification?

In a report to creditors, administrators Ernst & Young have said: “It has been confirmed that the valuation relied upon in the year ending 31 December 2007 statutory accounts of Wrekin Construction Co Ltd, purportedly issued by the Instituto Gemmologico Italiano, is a forged document.” The source of the forgery is as yet unknown.

To add insult to injury, a report by the Gem Testing Laboratory of Great Britain suggests that the ruby is “not thought to be of sufficient gem quality”, with Ernst & Young also hinting that it may be difficult to value the unusual stone.

Perhaps an indication of the true value of the gem might be found in the ruby’s past sale history: in 2002 Trevor Michael Hart-Jones bought the 2kg uncut ruby for £13,000. He then took it to London where an amateur ‘gem enthusiast’, waving a now-contested reference from Asprey & Garrard, is said to have valued the stone at something between $20m and $23m. Mr Hart-Jones then apparently lost the ruby, only for it to turn up in 2006 when Mr David Unwin of The Tamar Group legitimately obtained the same uncut rock for £300,000 as part of a land deal. The Tamar Group then took over Wrekin Construction in 2007 and listed the gem, apparently re-valued at £11m, among its assets. Note 13 of Wrekin’s 2007 accounts states: “The fair value of the ruby gemstone was determined by a professional valuer at the Instituto Gemmologico Italiano based in Valenza, Italy, on 31 August 2007.”

According to Contract Journal, listing the £11m gemstone as an asset in its accounts appeared to transform Wrekin from a company with an £8m liability in March 2007 to one with net assets of £6m by December 2007.

It must then have come as a bitter blow to Wrekin Construction’s creditors and employees to learn, when the company went into administration in March 2009, that £11m-worth of interest-bearing preference shares had already been issued against the ruby’s supposed value, meaning that the gem couldn’t be sold and the money used to save the company. Interest-bearing preference shares must be pretty special things if they are issued in exchange for a 2kg uncut ruby worth £11m, so I was interested to find out a little more about them.

It appears that preference-shares are different from ordinary shares in that they can be regarded as ‘hybrids of debt and equity’, offering a fixed dividend similar to interest payments and as such can provide considerable extra income. Moreover, because preference dividends are paid out of taxed corporate profits, they are classified as ‘franked investment income’, meaning there is no further standard rate tax to be paid on the income. Preference shares have to be paid before dividends on ordinary shares and – get this - preference shareholders have a higher priority if a company is liquidated! As it says on the Interactive Investor website, “Most investors don’t know that much about preference shares, but if it’s income you’re after, they are worth considering.”

Mr Unwin is said to be “very deflated” by the discovery of the forged valuation document, believing he had bought a ruby potentially worth £11 million.

Tagged as: Asprey & Garrard, David Unwin, Ernst & Young, Gem of Tanzania, Gem Testing Laboratory of Great Britain, Instituto Gemmologico, Michael Hart-Jones, The Tamar Group, Wrekin Construction