The latest administrators report for LM Investment Management shows commissions of $10 million are subject to claims by financial advisers. However, the actual investors themselves have not been deemed by the LM group administrators to be creditors. Rather, their savings rank behind the fees of the very people who put them into these dud investments in the first place.

Business Day revealed yesterday LM founder Peter Drake had taken at least $46 million in loans before his mortgage fund empire collapsed earlier this year. These have not been repaid and Drake appears headed for bankruptcy.

In light of the loans to Drake and the feeding frenzy by the administrators and their lawyers, the prospective returns for investors in the LM suite of funds is diminishing with every week that passes.

Since the collapse in March this year, the administrators FTI Consulting have charged $2.4 million in fees, or $130,000 a week. Disbursements came to another $2 million.

The FTI report into LMIM, and its report into LM Administration, show the administrators are seeking to recover the Drake loans. They are also considering action against LM's other directors – Francene Mulder, Katherine Phillips and Eghard Van Der Hoven.

“From our investigations to date, there is evidence to indicate the company may have traded whilst insolvent for a period and entered into certain transactions that may be voidable against a liquidator,” says the report.

It is investigating “uncommercial transactions”, including $20.6 million in payments made between January 2012 and March 19 this year, when the administration began. Some 12 per cent of this involved payments to Drake and other related parties.

Deals with associates had been a feature of LM long before then. According to evidence in the Supreme Court proceedings, $163 million in related party transactions had been made across all the funds and LM entities.

Another four directors – Simon Tickner, Lisa Maree Darcy, John O'Sullivan and Grant Fischer – resigned last year as LM's financial position was deteriorating.

The report cited four main reasons for LM's collapse:

* the inability of the Managed Performance Fund (MPF) to meet margin calls on foreign exchange in February and March this year,

* institutional investors Friends Provident and Royal Skandia removing MPF as an investment option,

* the consequent fall in management fee revenue,

* significant related party payments from LM Administration (read the Drake loans).

But the causes go deeper than that. LM had an overly complex structure with inadequate corporate governance and controls. For instance, the failure of management to ensure independent property valuations in the funds was a critical weakness.

Despite these things and even despite the ravages of the global financial crisis in 2008, Peter Drake was able to keep marketing worldwide and raising more money for the LM funds until 2012.

Unfortunately for his investors – as opposed to their financial planners who were on commission of at least 3 per cent of their clients' savings – the fund fees were too high. And a good deal of this was even pre-paid – that is, paid up front before the service was actually provided (and before the collapse came).

LM Administration, which is the vehicle from which Drake took the greatest personal benefit, and of which he was sole director and shareholder, received $14 million in "pre-paid income" from six LM funds, including the flagship LM First Mortgage Income Fund.

In 2010 and 2011, even as many of the funds were frozen, the gross income of LMA – also the company which made a $30 million in loans to Drake - increased by 118 per cent, from $9.5 million to $20.8 million, "mainly due to a 200.49 per cent increase in management fees".

Via the circuitous LM corporate structure, fees were paid (including the pre-payments) from the funds into LM Investment Management. Then much of this was then passed through to Drake's LMA via service agreements. LMA, in turn, lent Drake $30 million – although he also drew a $16 million loan straight from one of the funds, the Managed Performance Fund - into his Hong Kong company Century Star Investments (CSI).

CSI, in turn, was a major shareholder in LM.

The director loans to Peter Drake may face scrutiny from the Tax Office if they are deemed as income as there is no evidence from public materials that there was any tax paid. It may be that $46 million in Drake loans remains, as yet, as good as tax free income for the director.

As outlined in this story, the Kiwi businessman also lent money from the funds to a number of companies he controlled to do property developments.

More than half of the funds in the MPF – $234 million – had been directed into the Maddison Estate project in the hinterland of the Gold Coast. Another Drake entity controlled the project.

According to the administrators' report, MPF's financial advisers have claims for $2.7 million in commissions and the First Mortgage Investment Fund's advisers have claims for $7.4 million even though the fund was frozen long before the LM collapse. Fees were paid to advisers despite investors being locked in without the prospect of redemption.

FTI is locked in a skirmish with the Trilogy Group for the management rights to the flagship LM First Mortgage Income Fund. Trilogy is the major unit-holder in the fund with 23 per cent. It says it would be better for investors if the fund were managed by a Responsible Entity rather than paying large fees to a receiver or liquidator as well.

For its part, FTI is now recommending liquidation.

Trilogy is seeking orders in the Queensland Supreme Court to replace LM Investment Management, and therefore FTI, as responsible entity. Judgement is pending.

Peter Drake has also brought proceedings against Fairfax Media and this reporter for defamation. Fairfax is defending the case.