The managers of the suspended £117m Axiom Legal Financing fund carried out "little or no due diligence" on the cases in which they invested shareholders' money, according to KPMG.
Graham Hampson and Ronan Guilfoyle, the directors of the fund which loans money to law firms running no-win, no-fee cases, have petitioned the Grand Court of Cayman to have the Axiom fund wound down because it is unable to meet its financial obligations after investing outside of its remit and following allegations it is a Ponzi scheme.
Court documents seen by IFAonline allege the investment criteria of the portfolio - as set out in the offering documentation of the fund - "do not appear to have been adhered to".
They also state KPMG's investigations "reveal grounds for suspecting there has been mismanagement" of the fund's assets, and that the net asset value of the fund has been "overstated".
"Little or no meaningful due diligence was carried out on the cases being funded", the document stated.
However, KPMG has confirmed the portfolio is not a Ponzi scheme in the sense that loans have been made to a panel of law firms conducting genuine cases.
Further investigations are required to ascertain whether allegations of fraud have any foundation, the court papers said.
The criteria for the fund providing financing to law firms is that the loans are for cases that can be completed in under a year. However the court papers noted that most, if not all, of the cases being funded will take well over a year to complete and a "significant number" are not expected to complete for 24 to 36 months.
At least one of the panel of law firms the Axiom fund loaned money to appears to have been close to insolvency at the time the loans were granted, according to the court filing.
Loans made by the Axiom fund included a "facilitation fee" of 50% of the loans' value which the panel of law firms had to repay. This fee was deducted by the loan manager Synergy from the loan amount and paid to various third parties.
A spokesperson for Regulatory Legal said: "This fund has been subject to scrutiny for quite a while. We act for a number of parties interested to understand why the funds systems and controls did not pick this up"
Has been cold-calling consumers
New shares admitted to London Stock Exchange
Slow and steady growth
Missed funding target by £240,000
Denies any wrongdoing