EDINBURGH investment house Martin Currie has been handed a £3.5 million fine by the UK's Financial Services Authority and a $8.3m (£5.1m) penalty by the US regulator for failing to manage a conflict of interest between two clients.
The US regulator, the Securities and Exchange Commission, said yesterday it had charged Martin Currie for "fraudulently using one of its US fund clients to rescue another client, a China-focused hedge fund struggling in the midst of the global financial crisis".
It noted Martin Currie had, "without admitting or denying the findings" except as to jurisdiction and the subject matter of the proceedings, submitted offers of settlement which it had determined to accept.
The FSA noted its £3.5m penalty was the largest fine it had ever imposed in a conflict of interest case. The penalty is sizeable in the context of past regulatory fines imposed on Scottish financial institutions.
Willie Watt, chief executive of Martin Currie, last night described the events which gave rise to the penalties as "regrettable".
He said Martin Currie "promptly self-reported" to both regulators when the events came to light.
Mr Watt added that the settlement with the FSA and SEC was "full and final for Martin Currie".
Neither the SEC nor FSA named any individuals involved in the matter.
Martin Currie's Chinese fund operations were led by joint venture partner Chris Ruffle, who parted company with the Edinburgh investment house last summer.
The SEC, summarising its case, said: "This case involves improper preferential client treatment by the UK-based Martin Currie group of institutional investment managers.
"In April 2009, in the midst of the financial crisis, Martin Currie fraudulently used its US-registered investment company client, The China Fund Inc to rescue another client, a hedge fund called the Martin Currie China Hedge Fund LP.
"The hedge fund had acquired significant – and largely illiquid – exposure to a single Chinese company and required liquidity to satisfy mounting redemption requests from its investors. Martin Currie caused the China Fund to enter into a transaction that alleviated the hedge fund's liquidity concerns by redeeming a substantial portion of this exposure."
The FSA said: "The conflict of interest arose when Martin Currie caused one client (Fund B) to enter into an ill-advised transaction which rescued another client (Fund A) from serious liquidity concerns. Both Fund A and Fund B focused on making investments in the China market, and were managed by Martin Currie from its Shanghai office. In April 2009, Martin Currie caused Fund B to invest around £15m in an unlisted bond issued by an offshore Chinese firm.
"Martin Currie failed to ensure that the bond's valuation or the rationale behind the investment were properly scrutinised at the time of the transaction, and it proved to be a poor investment for Fund B, halving in value over the next two years. While the investment was detrimental to Fund B, it had significant advantages for Fund A."
The FSA said Martin Currie received a 30% discount on its fine for settling "early" and would otherwise have faced a £5m penalty. It added that Martin Currie "brought the breaches to the FSA's attention and has co-operated fully with the FSA's investigation, compensated Fund B for its investment losses after the fund raised concerns, and has spent considerable time and money investigating the issues itself and addressing the concerns raised by the FSA".
Robert Khuzami, director of the SEC's division of enforcement, said: "The misconduct in this case strikes at the heart of the fiduciary relationship between an investment adviser and its client. Advisers must treat each client with undivided and disinterested loyalty, and must make full and fair disclosure of all material conflicts of interest."
Martin Currie said it had "taken disciplinary action against certain individuals" in relation to the matter.
Mr Watt said: "Whilst we take these matters very seriously, it is important to note that many of the SEC's charges against investment management firms in the US are brought under antifraud provisions. This is not the case in the UK."
As the penalties were announced, Martin Currie declared it had agreed £25 million of new investment from existing shareholders. It is believed the bulk of this will come from its external investors, US private equity firm Crestview and interests associated with Lord Jacob Rothschild, with 20 Martin Currie directors also putting up money. Martin Currie, which employs 220 people and manages £5bn of funds, said this new investment "materially strengthens the business".
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