Leeds-based IFA Lampott Ltd must defend a £2m claim for damages at the High Court, after it invested more than a third of a company pension scheme in failed life settlement firm Keydata.
This week, in a separate case, court proceedings have been issued against Lampott by trustees of a workers' pension scheme at small North Yorkshire firm, Micro Metalsmiths.
Lampott disputes their claim that its principal, Richard Lamborn, was negligent to recommend investing £2m of the company's fully-funded £5.7m pension scheme in Keydata, on the grounds it was 'low risk'.
Lamborn told IFAonline the level of due diligence carried out by his firm makes its position "entirely defensible".
"We recommended a product to assist in diversification. We discussed the product at length with the client. Keydata, as published in its prospectus, seemed to meet the investment needs satisfactorily. We also met with the directors of Keydata and spoke to the FSA.
"The answers we got, coupled with the prospectus, met all of the criteria so we put it forward as suitable. We are comfortable the advice we gave was appropriate."
The Financial Services Authority (FSA) last month said it plans to ban the sale and promotion of traded life settlement policies - like those which backed Keydata products - because they are high risk and "generally unsuitable for the majority of UK retail investors".
Law firm Regulatory Legal, which represents Micro Metalsmiths, said Lampott has so far refused to disclose details of its professional indemnity insurer, forcing the issue to be resolved through the courts.
Michael Cotter, solicitor at the law firm, said: "We are concerned the firm does not have the assets to defend the claim. Our clients are also particularly concerned about the investment in light of the FSA announcement on TLPIs."
Court particulars of claim show how, in March 2006, the trustees of the company scheme wanted to liquidate some of their investment portfolio - which was heavily exposed to equities - and to invest the proceeds in ‘appropriate low risk products'.
Lamborn recommended the Keydata investment as a "very low risk" option.
"If the trustees are going down the secure route then I think you should concern [sic] the information below [on Keydata].
"I have placed a lot of pension money here as a partial (never eggs all in one basket) alternative to gilts and bonds," he wrote in an email to the trustees in March 2006.
With the remaining money still in equities, they instructed Lamborn to preserve the £2m capital, and match the ongoing liabilities of the scheme to income from an investment in a Keydata Secure Income Plan.
Documents show Lamborn listed the risks of investing, including "Keydata going bust" and incorrect actuarial modelling, about which he said: "One suspects the fund manager make [sic] an allowance for these factors too when assessing the g'teed [sic] rates & [by holding] 33% in cash".
In its November consultation to ban TLPIs - which many advisers have criticised - the FSA referred to actuarial modelling as a key risk of the products.
The Keydata portfolio suffered from a lack of expected maturities which contributed to liquidity problems at the fund, and led the FSA to put it into administration in June 2009.
The case is expected to last several months.
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