Further details have emerged of the alleged 'magic circle' of managers of split capital investment trusts after a BBC investigation into the troubled sector.

Radio 4's Inside Money helped one disappointed investor examine the trail of responsibility after he lost most of his original investment.

An investment which he and thousands of others like him expected to be low risk.

Tony Abramson was devastated when he discovered his initial �20,000 investment had shrunk by 90%.

Inside Money helped Mr Abramson quiz leading industry figures about who was responsible for his loss.

In doing so, the BBC was given details of alleged collusion and the part it may have played in the sector's downfall.

The investigation

Around 40 of the 134 split capital investment trusts are in serious difficulties due to stock market falls, heavy borrowing from banks and high levels of cross holdings between trusts.

"Quite a number of split capital investment trusts invested in each other"

The FSA's John Tiner

The UK's Financial Watchdog, the FSA, launched an investigation in May, stressing only a minority of firms were involved and the sector as a whole did not pose particular risks or problems.

While the investigation has been underway the FSA has not been keen to speak on the issue but when approached by Inside Money, the FSA's John Tiner confirmed:

"What we are aware of is that quite a number of split capital investment trusts invested in each other"

Tony Abramson has lost 90% of his initial investment

If the prospectus and marketing material explained this policy to investors then John Tiner said in principle the trusts had done nothing wrong.

However, if the fund manager engaged in activities that were not in the interest of the investor but rather in the interest of another fund or manager then collusion may have arisen.

The investigation could lead to enforcement action by the FSA, resulting in companies or individuals being fined and, in some cases ordered to compensate customers.

'Major scandal'

"It is a major scandal"

Liberal Democrat Treasury spokesman Lord Newby

Liberal Democrat Treasury spokesman Lord Newby, who has championed the victims cause, is in no doubt:

"It is a major scandal... Extraordinarily well paid people knowingly, in my view, marketed products which were hugely risky and they did it in a way in which the people who bought the products could not tell that they were risky".

Explaining how collusion may have taken place, The Association of Investment Trusts' Daniel Godfrey said:

"They would all invest in each other; and so effectively �100,000 would become �1 million of funds under management which they could all charge on, because they were borrowing money from banks."

"For every pound they raised of new money, they were borrowing another pound and they were taking another pound from another fund that already existed, so one would become three.

It was a structure designed to produce high yielding products for which there was demand, and in doing so, to build up management fees."

He insisted: "This is the allegation. I have not got any evidence this took place."

But he did confirm that if the allegations were true, his members, the investment trusts, would seek compensation from the fund managers.

Dangerous tendencies

The legendary economist Professor JK Galbraith, speaking from his home in Massachusetts, pointed out alarming parallels with the Wall St Crash of 1929 when cross shareholding was a key factor in the collapse.

"It was the classic and erroneous development that comes when one company invests for speculation in another company...

It tells us of the dangerous tendencies of the stock market and the likelihood that people involved will be carried away by false hopes and mild insanity."