THE company that gave a record £2.4 million to the Liberal Democrats is at the centre of alleged large-scale fraud by Michael Brown, the donor facing extradition from Spain.

Mr Brown is accused of forging documents involving purported trading of $1 billion (£560 million) on financial markets through his money management arm, 5th Avenue Partners Ltd.

If it is shown that the company was not “carrying on business” when the gift was accepted, the Lib Dems may have to surrender the donation, possibly forcing the party into bankruptcy.

Sir Menzies Campbell, the party’s new leader, said in the autumn that he would take more money from the controversial benefactor.

Mr Brown, who is being held in a Madrid prison, is said to be eager to return to Britain to fight the 53 charges in a criminal prosecution brought by HSBC, his banker. His spokesman said: “He has been involved in a commercial litigation since October 2005. It seems that this dispute has been escalated by HSBC into a criminal matter. His defence team is being assembled to fight these latest accusations.”

The alleged offences include claims of false accounting and forgery relating to the period last spring when the company was handing over large sums to the Lib Dems. In one charge, Mr Brown is accused of forging papers to show that he made $2 million (£1 million) profit from trades on May 5, general election day, when the Lib Dems were winning an unprecedented 62 seats.

Mr Brown, an expatriate Scot, who was arrested at his home in Majorca, is also accused of lying to get a new British passport by pretending that he had accidentally put his own through a washing machine in Spain.

The European arrest warrant, seen by The Times, is signed by District Judge Caroline Tubbs. Warrants were issued by Bow Street Magistrates’ Court on January 13 and City of London Magistrates’ Court on April 13. The document describes Mr Brown, to help the Spanish police to find him. Spanish National Police and the Guardia Civil seized him at his villa last Wednesday as he prepared for his 40th birthday party.

The warrant states that he effectively controlled 5th Avenue Partners Ltd, which banked with HSBC. In October HSBC became concerned that 5th Avenue may have been perpetrating a fraud through its bank accounts. The High Court granted a search order against 5th Avenue Partners Ltd and a worldwide freezing and tracing order against Mr Brown. The alleged offences on the arrest warrant arise out of the production and use of allegedly false documents in the civil litigation, it states.

Mr Brown transformed the electoral fortunes of the Lib Dems when he appeared from nowhere and agreed to fund them. He was barred by election law from giving a donation as an individual because he is not on the British electoral roll. Instead, the Lib Dems declared the gifts to the Electoral Commission, which polices donations, in the name of the newly created, London-based 5th Avenue Partners Ltd.

The company also provided Charles Kennedy, as party leader, with £30,000 of free flights on a corporate jet during the campaign.

By law, political donations may be accepted only from British companies that “carry on business”. If the commission suspects that 5th Avenue Partners Ltd was not trading when it financed the Lib Dems, it can ask prosecutors to investigate and confiscate the money.

The Lib Dems would face ruin because they have already spent the gifts on election posters and advertising. The party lives on modest reserves.

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