Credex's funny money has no one laughing

March 24, 2007

It was a house of cards built on dodgy dollars, and now the receivers and liquidators are hard at work. Ben Hills investigates.

FOR once the real estate agent's blurb does not lie. It truly is a magnificent property, perched on a ridge overlooking the Snowy River not far from Jindabyne - more like a luxury ski lodge than a private residence. There are seven bedrooms, all with ensuite bathrooms, two lounges with open fireplaces and cathedral ceilings, a snooker room and servants' quarters, surrounded by a hectare of landscaped grounds.

Until five years ago this was the residence of Bondi businesswoman Marsha Foxman and her family, the country retreat they had always dreamed about. Then, for family reasons, they decided to sell up and move back to Sydney, and that was where their troubles began.

Today that house is the centre of a legal battle that has left the Foxmans $700,000 out of pocket, broke, living in a rented home, and wishing they had never heard of a "barter business" called Credex, run by Valentino Kovacic, a 39-year-old Central Coast entrepreneur with a string of failed or deregistered businesses behind him.

From Sydney to the Gold Coast there are scores of people who are in the same boat, victims of a scheme that promised to bypass the cash economy by issuing "trade dollars" which could be exchanged for goods, services or property. But now the companies that issued the "funny money" have gone into receivership. A judge has ruled the trade dollars - anywhere from 20 million to 30 million of them - are not worth the paper they are printed on.

Like a house of cards, the property empire underpinned by Credex's print-it-yourself dollars has come tumbling down. At least five sets of receivers are involved in trying to sort out the mess, and the shortfall from just one, a string of 25 Sydney apartments acquired by a Bulgarian-born pickle importer, is likely to run into millions. A police investigation is under way in Sydney, and in Queensland investigators from the corporate watchdog, the Australian Securities and Investments Commission, are taking statements and deciding whether to launch a prosecution.

Trade-dollar schemes are nothing new. The oldest, the Queensland-based Bartercard, has been operating in Australia for 16 years, one of a dozen countries around the world where the British organisation - until recently listed on the London Stock Exchange - operates. It claims to have 23,000 members in Australia, and last year did $600 million of business, making its money by charging 6.5 per cent in real money on every transaction, says its managing director, Trevor Dietz.

Its members are in hundreds of businesses ranging from car hire to accommodation, renovations, cleaning, graphic design, travel, restaurants - and property. It works in the same way as other schemes: members agree to trade their goods or services for trade dollars instead of cash. A hotelier, for example, may earn credits by letting out a room to another member, which he can then exchange for some plumbing work. Bartercard keeps track of who has earned how many credits.

What are the advantages of doing business this way? Well, you don't get to avoid tax (unless, as some have done, you cheat) because the Australian Taxation Office regards a barter dollar earned as the same as a real dollar - and insists on payment in the genuine green stuff. But, say the barter companies, you do expand your customer base and improve your cash flow.

However, there are crucial differences between Bartercard and Credex.

First, Bartercard is a member of the US-based International Reciprocal Trade Association, which has a strict code of conduct. Second, it maintains a "debt reserve" to cover defalcations. And third, when it lends trade dollars by way of interest-free mortgages, it insists on independent valuations of properties, and it secures the loan against the property by way of a mortgage or caveat. Credex did none of these things.

The company was founded in the mid-1990s as Credex National Australian Trade Exchange Pty Ltd and the business was bought by Kovacic in 1999. In two interviews with the Herald, Kovacic was reticent about his background before this, although ASIC records show he had worked in real estate in western Sydney going back to 1992, and had already been associated with four companies that had been deregistered.

CNATE was deregistered in 2002, but Kovacic continued the business under the name of Credex Australian National Management Company Pty Ltd (CAN) until it was placed in liquidation in 2005. The business arose phoenix-like under a third name, Wallabie Holdings Pty Ltd, of which Kovacic's wife, Tracey, was a director until last year when it, too, was deregistered - the third incarnation of Credex to go out of business.

Kovacic blamed the corporate demise of CAN on the Tax Office: "We class [them] as legalised criminals, because what they did to that management company was absolutely criminal."

But although his companies were defunct, that did not deter him from promoting the Credex business - Kovacic employed a team of commission salesmen, and adopted a high profile, becoming the main sponsor of the Sydney Croatia soccer team, now Sydney United, and also promoting go-kart racing. It was that which led to a fateful meeting with Marsha Foxman which would wreck her family's lives.

As well as the Jindabyne mansion, Mrs Foxman had taken options on units in Lidcombe and Strathfield and late in 2001 was seeking to sell them and take a profit when she was introduced by a real estate agent to Kovacic, who then had offices in St Mary's.

"We had a number of meetings, and I must say he was very persuasive," Foxman says. "He said Credex was just like Bartercard, and you could use Credex dollars to buy property. When we decided to move back to Sydney, he said we could kill two birds with one stone by taking Credex dollars for a portion of the value of the Jindabyne house, and use those dollars to buy a unit in Rose Bay."

She eventually agreed to the sale of all three properties, accepting Credex dollars as part of the purchase price - $510,000 of the Snowy home's $900,000 sale price and another $192,000 on the Strathfield and Lidcombe apartments. It was when she started ringing Kovacic to find properties she could buy with her 700,000 barter dollars that she realised there was more to the deal than met the eye.

"I must have looked at 30 properties, in Rose Bay and all over the place," Foxman says, "But every time there was something wrong. Either the owner would not accept enough Credex dollars, or the price was inflated to the point where the Credex dollars were worthless. One place he [Kovacic] showed me in Rose Bay he wanted $1.8 million for, including $1.2 million cash. I thought it was worth no more than $1 million, and in fact it sold recently for $850,000."

All she says she was ever able to buy with her Credex dollars was "$200 or $300" worth of dental work at a Bondi dentist.

Kovacic disputes this.

"We showed her over a dozen properties," he says. "She took us to court and she lost and she [still] owes us costs."

After abandoning one court battle with Credex, Foxman enlisted the help of a sympathetic barrister, Les Einstein, and they managed to win a case against the purchaser of the Jindabyne mansion, a man named Assen Mitzev. In his decision late last year Supreme Court Justice John Hamilton ruled that because of the deregistration of CNATE "there was effectively no trading scheme and Credex dollars were, in effect, of no value".

So far, the determined Mrs Foxman is the only Credex victim to have a chance of getting at least part of her money back. Others contacted by the Herald have written off their "dodgy dollars" - and are furious that ASIC has refused to take action against Kovacic.

Peter Penkovits, for example, is a Sydney developer who brought together a group of "mum and dad" investors to finance a block of four townhouses in Kingsford during the building boom.

They sold them off the plan for $700,000 each - $500,000 cash and $200,000 in Credex dollars. According to the developer's son, Adrian Penkovits, a Parramatta accountant, they were told they would be able to exchange this for other property or building materials.

But when they came to try and buy materials for the next development, they found that those suppliers who would accept Credex dollars would simply discount their value to zero. For an excavation job, for instance, which should have been worth $95,000, one Credex member quoted $120,000 - $100,000 cash and $20,000 Credex dollars. Already facing other difficulties and unable to spend the $800,000 in "funny money" the development company was forced into receivership, and Peter Penkovits was declared bankrupt.

"I had a number of meetings with Valentino," Adrian Penkovits says. "One time he was driving a BMW he said had been purchased with Credex dollars. He said that the credits would be redeemed - I didn't care whether it was in ice-creams or $7 haircuts or whatever - but it was all crap. Millions and millions of dollars have gone up in smoke and ASIC won't do anything - it's completely unregulated."

Richard Putral, now retired, had been running Custom Auto Repairs in Hillsdale for 40 years. He had been using the Bartercard credit scheme for years, and so when a salesman banged on his door one day and gave him a spiel about Credex, he was prepared to give it a go.

"Some people regarded it as 'funny money' but it was a way of enlarging my clientele and getting additional clients, and it helped with cash flow. I kept it to five to 10 per cent of my business, and at the beginning it was very good."

But then, a few years ago, he had saved up $80,000 worth of Credex dollars so that he could buy an apartment as a retirement investment, as Kovacic had promised he would be able to do so. He inspected properties around Sydney, in Newcastle, the Gold Coast and as far away as Cairns - but it was always the same story. At the asking price the Credex dollars would have no real value: "A $500,000 property would be $580,000 if I wanted to use Credex."

Eventually Putral gritted his teeth and took the loss. "Of course it hurts - I lived a frugal lifestyle saving for my retirement … they were just fabricating it out of thin air. They think it's funny, but it's not funny at all - it's basically a rip-off."

Kovacic told the liquidator that his company was not responsible.

"We weren't involved in that aspect of the situation. Like if they wanted to buy at a particular price, that was usually arranged by brokers, and the vendor and the purchaser. All we were told is [sic] 'Can you authorise this amount?' They had trade dollars there or they had arrangements to pay the trade dollars off in goods, fine."

Abed Hammoud, a Sydney importer, found himself stuck with six shipping containers containing $340,000 worth of Iranian lounge suites, which he agreed to exchange for Credex dollars, after Kovacic told him he would be able to buy property with the credits. Eventually, he agreed to buy three apartments in the Grace Brothers development in Broadway, for which Kovacic was acting as the agent. But the sale fell through, and Hammoud has not only lost his $340,000 but also $1500 in real money he put down as a deposit.

As for Sydney Croatia, that sponsorship - which saw the team take the field with Credex's logo on their chests - was supposed to have been worth $400,000 over three years. But the club says it saw nothing by the way of real money - just barter dollars which it used for incentive payments for its players. Says the club's new chairman, Miro Tresoglavic: "I don't remember us seeing any factual dollars so I don't know whether we benefited from it really. They said you could buy furniture and electrical goods and so on with these credits, but one or two people tried to and I don't think it ever happened."

The club later went into receivership when the national league was restructured.

The list goes on. Of a dozen people who spoke to the Herald, only one - a Bathurst property developer who has taken more than $1 million by way of deposits on units - said he had received goods, and property, for his Credex dollars.

More were inclined to agree with Peter Ison, from real estate agents Ray White in Bathurst, who says: "To be honest, from our point of view we stay right away from it. If we got involved in these sort of things it would undermine our credibility."

But in his interview with the liquidator, Kovacic blamed rogue members. "From my recollection it was $13 million in credit and $15 million in debit. [There were] a heap of people that deserved to be buried because they effectively treated us like dog crap and made our life misery.

"Never paid their fees, used the trade dollars, used the credit line facility, breached all the rules. We sent them letters of demand and they basically told us to get stuffed."

The biggest victims - in dollar terms - of the Credex debacle will be the banks that failed to get independent valuations on the properties they were lending against, and the developers.

Many fell foul of 44-year-old Andrei Prodanov, a Bulgarian-born food importer and one-time friend of Kovacic. Prodanov, together with his wife, Borislava, and his company, Pace Marketing, set out between 2000 and 2005 to become a property tycoon. Using Credex dollars borrowed from Kovacic he boasted that at one stage he owned 40 properties around Sydney, worth more than $25 million - from a $350,000 unit in Lidcombe to a $4.2 million apartment in Rose Bay.

From information collected by corporate insolvency specialists PPB, it appears Prodanov amassed his empire for the outlay of little or no real money. First he borrowed the Credex dollars from Kovacic; then he used this funny money as part of the purchase price of the unit; then he took the sale contract to a broker or a bank such as NAB or Westpac (apparently knowing that these banks do not demand independent valuations for a property worth under $3.5 million) and borrowed more than the unit was really worth.

A typical example: one apartment he bought in Rose Bay had a purchase price on the cover of the contract of $1.49 million. But buried in the fine print was the fact that $1 million of this was to be in real money, and $490,000 in Credex dollars. Prodanov took the contract to the NAB and borrowed $1.2 million - leaving him $200,000, less transaction costs. Prodanov defaulted on the loan last year and the bank took possession of the apartment, but now values it at only $700,000-$800,000.

Prodanov, according to Kovacic, has disappeared. His solicitor said: "If you find him, let me know. I have an account here for him."

And the only assets PPB was able to lay their hands on was when it raided his warehouse in Blacktown were hundreds of bottles of pickled capsicums, goat's cheese and coffee. The accounting firm had to pay to get the food dumped, and raised only about $10,000 from the sale of some cases of Bulgarian vodka and wine.

The repercussions of the Credex scheme are being felt as far away as Queensland, where about 25 investors - many of them pensioners - have complained to ASIC that they have lost $2.5 million in a complicated deal involving a Gold Coast company group associated with Robina Properties Pty Ltd.

The liquidator of the companies, David Stimpson of Brisbane accountancy S.V. Partners, has told ASIC that aspects of the scheme bore similarities to a Ponzi scheme. (According to one description a Ponzi scheme is one "in which high returns are promised and new investors must continue to be drawn in to pay off earlier investors".)

According to the liquidator's report, $300,000 of the money was used to "buy" about $2 million in Credex dollars from a third party - valuing the Credex dollars at 6c each - to put deposits on apartments at a long-delayed development at the Mt Panorama road racing circuit near Bathurst.

A company called Mt Panorama Resort Pty Ltd is constructing a seven-storey block of 135 units right on Conrod Straight for car race fans, and has been selling the units off the plan.

According to the Robina liquidator's report, the company - which had been experiencing cash flow problems - agreed to allow Robina's investors to pay for 40 per cent of the purchase price of the apartments (they range from $290,000 to $415,000) with Credex dollars, and 15 sale contracts were signed. With the collapse of Credex, those Credex dollars used for the deposits now are worthless.

A director of the Mt Panorama development company, Stephen Fayle, said the development was now due to be completed at the end of May and that Mt Panorama Resorts would honour the contracts, or find alternative buyers for the units.

But a source associated with Robina Properties says: "[The investors] haven't got two bob to rub together, many of them. They were sucked in by the promise of a 50 per cent return in a year. If they have to come up with the balance of the purchase price in cash it will ruin them."

As for Kovacic, he maintains this deal had nothing to do with him, and blames Robina for the debacle. Speaking from his home at Forresters Beach he dismisses complaints by Mrs Foxman and others.

"This woman has a bee in her bonnet. Her finance company knocked her back." He insists that Credex is a legitimate scheme and "I'm not involved in anything funny".

In his interview with the liquidator, he also blamed members for buying trade dollars "not off us [but] off other members. Paying 20c in the dollar, ripping them off."

He says Credex has now had its fourth incarnation and this time the business is called Credex Plus and Credex Advantage, a "completely new entity [which] we are going to float [on the Stock Exchange] in the not-too-distant future, so we want to make sure everything's above board. and no one can question what we've done."

And just to show there were no hard feeling he offered goods to the value of what his creditors had lost. To which Marsha Foxman says: "We have heard it all before I wouldn't waste my time." And Adrian Penkovits adds: "It's just a joke."

Meanwhile, that house on the ridge near Jindabyne is coming up for sale - though after all her time and trouble and legal costs, Mrs Foxman won't get a cent out of it unless it sells for a good price.

In real money, that is.

