The Financial Conduct Authority (FCA) has banned a former adviser to SLS Capital - the company whose bonds underpinned the failed Keydata investments - for giving the misleading impression that the SLS bonds were soundly backed assets.
Former chief executive of CIB Partners Arnold Eber was engaged as an adviser to Luxembourg-based special purpose vehicle SLS Capital between September 2007 and mid-2009.
From September 2007, the FCA found that Eber had become aware that without continuous cash injections there was a high risk that the SLS portfolio - a collection of second hand life policies on which premiums needed to be paid for by SLS until maturity - would suffer from severe liquidity problems within a year.
As Eber expressed it, SLS was "bankrupt" because of the amount of interest outstanding to bondholders versus the premium required, and would have been "under water" in just over a year.
Despite this knowledge, Eber issued a number of false and misleading documents about the strength of the SLS portfolio, and failed to disclose to the then regulator the Financial Services Authority (FSA) the extent of the problems with the investment.
SLS-backed Keydata bonds were sold to UK investors via financial advisers, largely on the grounds that they were low risk and offered returns that were uncorrelated to the stock market.
But in June 2009 Keydata was put into administration due to severe liquidity problems as the second hand life polices backing its bonds - including much of the SLS portfolio - failed to mature as expected, and amid claims of a misappropriation of funds.
Keydata investors had invested more than £100m in bonds issued by SLS Capital. Sums had also been invested in SLS bonds by investors who had not invested in Keydata.
The Serious Fraud Office officially ended attempts to trace the assets of SLS Capital in November 2012 after a lack of success.
Keydata senior management remain under investigation by the Financial Conduct Authority.
The Financial Services Compensation Scheme (FSCS) has accepted that investors in SLS-backed Keydata Secure Income bonds 1,2, and 3 are eligible for compensation, up to the scheme's limit of £50,000.
However the FSCS and law firm Herbert Smith are currently pursuing advisers who advised Keydata bonds backed by the SLS portfolio through the courts, in order to claw back some of the money it has paid out - paid for by industry levy payers including investment advisers -, on the grounds that much of the advice to invest in Keydata was unsuitable.
The FSCS levied the investment industry about £242m of a total £326m interim levy for Keydata compensation costs. It is part of the scheme's mandate to recover those cost from third parties where possible, and reimburse levypayers.
Read more on Keydata HERE
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