The Financial Services Authority (FSA) has set out its case against some of the directors and companies involved in the Arch Cru debacle. Here, we pick five highlights of what was allegedly going on behind the scenes at one of the industry's most costly collapses.
Here are five highlights of what was allegedly going on behind the scenes...
1) AFP chief executive Robin Farrell sold shares in parent company Arch Group to the Arch Cru Guernsey fund range, netting him £492,359.
The shares were sold at a price determined by one of AFP's directors with no independent verification and inadequate contemporaneous recording of the conflict of interest. Farrell failed to notify the non-AFP directors of the Arch Cru funds of his capital gain.
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2) AFP caused the Arch Cru Guernsey cells to invest in the UK funds' distributor, Cru Investment Management.
Cru was a major business partner of AFP, and the decision improved AFP's ability to negotiate favourable distribution terms with Cru and enabled AFP to benefit from increased funds under management, the FSA claims.
AFP "recklessly failed to manage the conflicts of interest arising from this transaction", in particular, by failing to disclose to the non-AFP Guernsey cell directors material factors in respect of the clear benefits obtained by AFP and AFP's business partner from the Guernsey cells' investments.
3) AFP caused the Guernsey cells to invest in a company associated with AFP, which disproportionately benefited AFP's parent company Arch Group compared to the Guernsey cells.
In particular, the FSA claims, AFP also directed the Guernsey cells to purchase certain share warrants from its parent company's nominee on the basis of a valuation prepared by Farrell, who was also the majority shareholder and director of the parent company, which led to a profit of £49,999 for AGL.
AFP continued to direct the Guernsey cells to invest in the company at a time when there was a clear and obvious risk that further investment was likely primarily to benefit AFP's associates rather than the Guernsey cells providing the funds.
AFP "recklessly failed to manage these conflicts of interest", and there is no evidence that AFP disclosed the conflicts to the non-AFP directors of the Guernsey cells, or that the conflicts were contemporaneously recorded.
4) AFP's investment decision-making structure was also "flawed".
The FSA said that, before December 2008, when AFP "put Chinese walls in place", the same committee was making decisions regarding the management of the UK funds and the Guernsey cells and the Guernsey cells' underlying investments.
Therefore, there was a risk that individuals making decisions at UK fund level had knowledge of confidential information about the Guernsey cells which other external investors in the Guernsey cells and the market in general did not possess.
This was particularly serious given that the Guernsey cells were publicly listed.
5) The compliance monitoring undertaken by AFP during the relevant period was also "inadequate".
The FSA said there was no documented monitoring programme in place and put into practice until November 2008. Compliance monitoring results were not sufficiently recorded and AFP's records did not demonstrate that adequate reporting of such monitoring to senior management took place.
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