Part of a £2.4 million donation received by the Liberal Democrats from a disgraced financier came from a pensioner who is being forced to sell his home.

Robbin Watts, a retired building contractor, unwittingly invested £155,000 with Michael Brown’s company, 5th Avenue Partners, in April 2004 believing that he was investing in guaranteed bonds.

His money, which was raised against his home, was then given to the Lib Dems to help to fund their most successful postwar election campaign and the party is refusing to give the money back. The disclosure is the first time that a British taxpayer has claimed that his money has been given without his consent to the Liberal Democrats by Brown.

The Times has established a money trail from Mr Watts via a Swiss trustee and a Danish businessman to a Spanish 5th Avenue Partners account, from which it was apparently transferred to the Lib Dems. The trail will become part of a worldwide police investigation into Brown’s activities.

It is believed that the City of London Police will arrest the Glasgow-born trader next month over money-laundering offences. He is serving a two-year sentence for a passport offence and perjury.

Speaking from his home near Salisbury, Wiltshire, Mr Watts, 65, demanded that the Lib Dems pay him back so that he could stay in his £625,000 home, which is now on the market to pay off his debt. “I have been fooled along with many others into giving money to the Liberal Democrats through Michael Brown,” he said. “The party should do the honourable thing and give it back to people such as me who have been ripped off.”

His problems began in 2003 when he decided to join six other investors who searched for a way of placing a total of $2.2 million (£1.2 million) in a high-yield scheme. The group was coordinated by Tony Slark, a businessman based in Chertsey, Surrey.

The group agreed to place their money with a Danish firm called Anleco, run by Holger Anderson, a Copenhagen bussinessman. Mr Watts, who has traded in commodities before, believed that he was investing in guaranteed bonds.

He applied for a loan against his property to ensure that he had the minimum investment of £155,000. He transferred the money to a Swiss trustee in September 2003 and it was released to Mr Anderson’s company about six months later.

Mr Anderson told The Times that he arranged to pay the money to 5th Avenue Partners in April 2004. It was transferred to a dollar account in Spain, he said.

Mr Watts later asked for his money back. Mr Slark told The Times that he obtained agreement for the transfer of £460,000 between March 2004 and October 2005. The money was passed on to the investors. In August 2004, Brown wrote a cheque to Mr Anderson for £638,061.98, which came from his HSBC offshore account in St Helier, Jersey, but the cheque bounced.

Brown was courting, and being courted by, the Lib Dems. He approached the party, then led by Charles Kennedy, in December 2004 and offered to make a donation. After meetings with Mr Kennedy, he told them that he would help to fund their general election campaign with £2.4 million, the party’s biggest single donation.

Brown could not make a legitimate donation as an individual because he was not a registered voter and lived abroad. Instead, he arranged to make the donations through his company. It has since emerged that financial investigators examining 5th Avenue Partners books failed to find a single trade in bonds. The High Court ruled last year that the investment scheme was fraudulent.

Brown was unavailable for comment but his spokesman said: “He would prove the factual inaccuracies of these latest allegations as soon as he is able.” The spokesman confirmed that the cheque to Mr Anderson had bounced, but that it was followed by a telegraphic transfer.

Brown’s spokesman added: “Any dispute between Holger Anderson and the UK investors are of no concern to Mr Brown or 5th Avenue Partners Limited.”

The Lib Dems have said that they would hand over the money to the Electoral Commission only if ordered to do so. A spokesman said that the party would examine Mr Watts’s claims in due course. “We have not heard anything in relation to these particular allegations until now. We acted in good faith in relation to the donations we received two years ago and which were properly spent on the 2005 general election campaign,” he said.

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