Following the collapse of Mayfair Cellars amid claims of fraud, collectors are concerned about how their wine is stored. Jim budd looks into what went wrong at Mayfair and asks whether merchants are doing enough to ensure their customers’ wines are safe��
The astonishing collapse into administration of London fine wine merchant Mayfair Cellars has seen collectors ask themselves whether the wine they have stored with a merchant is actually safe.
Over a period of four years, the finance director of the Mayfair Cellars, Dominic Smith, allegedly took £1m-worth of wine from the customer reserves of the Mayfair Cellars and sold it without the owners’ knowledge or permission to two UK merchants – Farr Vintners and Wilkinson Vintners.Decanter understands the illegally sold wine was made to appear as if owned by Smith’s partner, Andrew Comer, via false invoices to Wilkinson and Farr. ‘Regular sums were [then] paid to Comer from the unauthorised sales,’ reports Mayfair’s administrator Grant Thornton. The wine continued to be shown on the Mayfair stock list and the theft was only obvious when a physical check in the bonded warehouse was carried out.
As Mayfair was seriously indebted, the chance of creditors getting much money back is slim. A creditors’ meeting was due as Decanter went to press. The unaudited accounts to March 2005 showed debts of £784,053. Today, those debts stand at £1,370,000. Civil proceedings are now underway against Smith.
While invoices apparently covered the illegally sold wine, it is not known if all payments were to Mayfair’s bank account, or whether some payments went to a third party. When asked, Patrick Wilkinson, managing director of Wilkinson, declined to answer. ‘Both Wilkinson and Farr have been requested to provide documentation relating to the unauthorised sales,’ says Grant Thornton. ‘Both have promised to provide this, but have yet to do so.’ Though there is no suggestion of collusion on the part of either, both will surely want to review their controls to ensure such a fiasco cannot re-occur.
Certainly the Mayfair management has questions to answer over how it managed customers’ wine reserves – questions it has so far declined to answer. But more importantly, should customers with sizeable inventories at other merchants be worried about the possibility of the same thing happening to them?
UK merchants and brokers trade with each other continuously – both to source wine for their customers and because buying Bordeaux in the UK is often cheaper than doing so via négociants. Consequently, it is vital to have controls in the buying and selling process.
Christopher Burr MW, managing director of London-based global online wine exchange firm Uvine, explains his selling controls. ‘Our systems would require collusion between our stock manager, settlements clerk and financial controller. Stock cannot be moved or traded without an automated email to the client. It would require a very sophisticated fraud to bypass our systems.’
The main control in buying wine is the payment process. ‘We don’t do business with people we don’t know,’ says Alan Rayne of London’s Magnum Fine Wines, a French specialist which creates investment portfolios for clients. ‘We expect to be invoiced by the company selling the wine and to make payments to that company. If an alternative arrangement were requested it would ring alarm bells.’
John Morgan of East Sussex-based brokerage house Morgan Classic Wines makes a similar point. ‘If the invoice was not from the company concerned, we’d be suspicious. As we deal with most brokers and fine wine merchants regularly, unusual offers are immediately obvious.’
Although in most cases your wine is secure in a bonded warehouse, there have been many instances in the last 20 years where customers’ wine has disappeared – stolen or lost with little or no compensation (see panel opposite).
Most people would hope that the threat of being caught and prosecuted is sufficient to deter fraud within a company. Sadly this is not the case. Moreover, the UK’s record on pursuing and punishing fraudsters is far from impressive, as the Attorney General, Lord Goldsmith, has acknowledged: ‘To put it bluntly, the risk of detection, investigation, prosecution and conviction of an offence of fraud is small. And, if you are unlucky enough to be caught, the sentence is probably tolerable for the gains you have made.’
While researching this article, I was surprised to discover the practice of borrowing from customer reserves. Say a broker receives an urgent request for a case of 1982 Mouton-Rothschild, is unable to supply immediately but has a case in customer reserves and knows he can get a replacement. The urgently required case is removed from customer reserves and later replaced. Of course the provenance of the two cases is unlikely to be the same. If the original was purchased en primeur and has never moved, and the replacement has travelled around the world, the second case will be worth considerably less.
It is hard to know how widespread this practice of borrowing is but enough people directly involved in the fine wine trade have mentioned this guilty secret to indicate that it does happen. Customers’ wines should be sacrosanct and this practice of borrowing is unacceptable.
The safer options
To ensure your wine is secure, a failsafe option is to set up your own account with a bonded warehouse. This will give you greater security and independence: you can deal with a number of fine wine companies and monitor the transferring of wines in and out of your account.
Morgan, whose merchant holds stock at London City Bond, explains: ‘The ultimate security is for customers to have their own accounts with the warehouse. If not, then only deal with trustworthy companies that carry out regular audited stock checks. An extra measure would be for merchants to arrange for the warehouse keeper to give the stock a specific customer code within the merchant’s sub-accounts.’
Octavian and London City Bond, which runs Vinothèque, a private customer facility in Burton-upon-Trent, are the two largest UK bonded warehouses. Some merchants, such as Seckford Wines, have their own bonded warehouse facilities.
Unfortunately, dealing direct with a bonded warehouse does mean customers have to manage their own accounts. Also, a bonded warehouse may not be set up to deal with lots of smaller customers. One alternative is to use a company such as Private Reserves Ltd or Nexus Wine Collections Ltd, which manage customer accounts in bonded warehouses.
Johnny Goedhuis is former managing director at London merchant Goedhuis & Co, and a director of its sister firm, Private Reserves Ltd, a wine storage and delivery company that uses Octavian. He says: ‘Private Reserves Ltd was set up in 1988. It has different shareholders and directors from Goedhuis & Co and is run from another address. It neither buys nor sells wines. Its only role is the storage and delivery of private clients’ wines. We wanted to ensure that whatever eventuality might befall Goedhuis, our customers’ wines would be safe.’ You don’t have to be a Goedhuis customer to use Private Reserves Ltd, though there is an initial handling charge for each case bought from another merchant.
Serena McCall runs Private Reserves Ltd, and explains the precautions it takes when releasing customers’ wine. ‘We only take instruction to move wine in writing. All new clients sign a form so we have a sample of their signature. If we take instruction from a secretary we always send a confirmation email to the address on the system. We never take instruction from other merchants. We explain that the customer has to contact us directly.’
Nexus Wine Collections is a more recent creation. The London-based storage company was set up by Mark Bevan, a former director of John Armit Ltd, now known as Armit, in August 2005 to offer a ‘bespoke service for collectors’ that provides ‘a secure, independent facility’.
Storage charges from both Nexus and Private Reserves compete well with those levied by bonded warehouses for private customer accounts. Nexus charges a one-off lifetime membership fee of £50 (ex-vat) and offers other chargeable services.
Many merchants offer the option of storing wine for you through customer reserves, although several sizeable companies, such as Adnams, Bibendum and Charles Taylor Wines Ltd, do not.
If you decide to use a merchant’s customer reserves facility, there are certain precautions you should take. Make sure your wine cannot be released without your permission. This is common practice among many companies and is part of the code of conduct of The Bunch, a coalition of six top UK independent merchants: Adnams, Berry Bros & Rudd, Corney & Barrow, Lay & Wheeler, Tanners and Yapp.
Alun Griffiths MW of Berry Bros explains its system and the new auditing procedure introduced following the Mayfair scandal. ‘We insist that any movement of customers’ stock must only happen on receipt of written authorisation from that customer. We shall also henceforth run a monthly audit, which will identify any delivery of customers’ stock to an address other than their own. These orders can then be investigated to see if there is anything suspicious.’
Stephen Browett of Farr says: ‘We will not release a customer’s wine without an email, fax or letter from the customer. Furthermore, no wine in our customers’ reserves stocks can be released without a check on the status of storage charges. The accounts department has to verify with the distribution department that storage charges are paid up to date before a wine can be released, and the customer is contacted if charges are due. This involves the 12 staff within the distribution and accounts departments communicating with each other. No individual can release wine without several others being aware of it.’ Other merchants at pains to point out that they do not release wines without written authorisation include Armit, Lay & Wheeler, Magnum Fine Wines and Tanners.
It is crucial that companies check that stock held in their bonded warehouse matches the company’s records. Decanter understands that in the case of Mayfair Cellars, there was virtually a complete mismatch.
Uvine’s computer system instantly records and reports any wine movement. ‘Our only issue is if a warehouse loses stock, or an inward delivery is short delivered and a proof of delivery issue ensues,’ says Burr. The next check is our six-monthly physical stock reconciliation, and the last check is our annual stock check and audit.’ The auditor’s report on stock held by Uvine for clients showed that, of the several million pounds-worth of stock, the company had £14,000 worth of discrepancies after six years of trading, This was for breakages, warehouse losses and misdeliveries. Burr says discrepancies were covered by a financial provision or insurance claims.
Robert Boutflower, private sales director at Shrewsbury-based independent Tanners, says: ‘We have a full-time stock controller. Customer reserves are kept in a locked area, separate from the company stock. We have checks and balances held by sales, stores and account departments, all covering each other.’
Although controls at Mayfair Cellars appear to have been unusually lax, and many merchants take the responsibility of looking after customer reserves seriously, it seems likely that there will be an increasing number of companies offering independent storage facilities.
The events at Mayfair should persuade the UK fine wine trade to look again at its systems and procedures. To ensure customers are confident that their wine is safe, there ought to be an agreed code of practice (such as The Bunch code) and other measures in place. It is not good enough to say, as some have, that because customers have not yet expressed concern then nothing needs to happen.
Jim Budd runs the wine investment website www.investdrinks.org