U.K. mortgage lender Market Financial Solutions left Barclays, HSBC and Apollo Global Management facing hundreds of millions of dollars in potential losses when it collapsed in February.
Now, bankruptcy administrators allege its owner, Paresh Raja, moved around $550 million of MFS-borrowed funds into personal bank accounts and then bought luxury cars including six Ferraris and three Rolls-Royces.
A spokeswoman for Raja said he strongly denies the allegations, and that there was no fraud or dishonesty. “Assets which the administrators characterize as missing were held through nominee structures for the benefit of MFS and its creditors,” the spokeswoman said, adding that the administrators had been given detailed information about those assets.
The U.K. commercial court where the bankruptcy is playing out applied a freeze on Raja’s worldwide assets in March.
Raja reported around $342 million in overseas assets to administrators as part of the March freezing order, according to the legal claim. The court-appointed administrators from Alix Partners said wealth on such a scale could only have come from misappropriation.
They alleged Raja used company money to fund a lavish lifestyle, and that his car purchases also included at least three Aston Martins and two Mercedes.
MFS entered bankruptcy after lenders asked why they weren’t getting expected payments and Barclays blocked some of the group’s 200-plus bank accounts. The group was founded by Raja and his wife in 2006 and in recent years became a main provider of bridging loans in the U.K. The loans are used by landlords and overseas investors to buy properties as a bridge on the way to arranging a longer-term mortgage or financing.
In total, lenders provided around $3.5 billion to MFS entities but administrators said they could only verify around $1.6 billion in actual loans made by the entities, plus cash balances of around $233 million. They allege the remaining $1.7 billion was misappropriated by Raja.
The MFS bankruptcy showed how cracks are appearing in the previously red-hot private credit market, where often lower-quality borrowers can tap private lenders such as investment funds instead of going to a bank. Mainstream banks still lend into the market but in less-direct ways that can obscure their exposure, such as by financing an investment fund making loans to companies.
Barclays recently wrote off around $310 million of its $680 million exposure to MFS, while HSBC took a $400 million charge last week over loans it made to Apollo’s Atlas SP Partners unit to buy into the deals. Atlas has said it has around $540 million in exposure. A spokesman for HSBC declined to comment and Barclays and Atlas didn’t immediately respond to requests for comment.
Administrators were appointed on behalf of Apollo’s Atlas unit. They previously said more than $1 billion in loan collateral appeared to be missing at two MFS funding vehicles, and that individual property titles were pledged to multiple lenders without the lenders knowing.
The claim seeks around $2 billion back from Raja to compensate for the alleged wrongdoing.
Write to Margot Patrick at margot.patrick@wsj.com
