Arch Financial Products has been accused of taking £3m in fees for a deal involving the Arch Cru funds which "was valued at nil", the High Court heard today.
The case against Farrell and Arch is being brought by SPL funds, which took over the failed Arch Cru cells, on the grounds of conflict of interest and breach of fiduciary duty in Arch's role as investment manager.
Claims that Arch pocketed a secret £3m fee relate to an investment made by Arch Cru in heavily indebted student accommodation business Club Easy through holding company Lonscale.
Arch Cru paid £21m for the business which lawyers for SPL argue was "worthless", and did not justify such a large fee for Arch or deal partner Foundations Capital, a British Virgin Islands-based company with which Arch had a "close business relationship", which also received a £3m payment as part of the deal.
Farrell argued that the payments his company received were authorised.
The High Court was told that the value of the Club Easy business was never properly assessed by Arch in a breach of the investment manager's duty of care and contract.
Also the investment was made without first obtaining third party funding which would have been essential to make it profitable, according to independent reviews.
Lawyers for SPL argued that Farrell, in helping to arrange the Club Easy sale and permitting it, acted dishonestly and in his own interest.
It was a "disastrous investment with little hope of any recovery", the court heard.
They added that the £6m in combined fees taken by Arch and Foundations Capital, were over and above the investment management agreement.
Such an "improper culture of payments shows itself dishonesty", they told the court.
The claimants also allege that the Club Easy investment was an active breach of mandate and not permitted under the terms of the Arch Cru scheme because it wasn't "with a bias towards late stage structured finance or early stage venture finance".
The trial continues.
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