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By Donia O'Loughlin | Published May 08, 2012

Arch defence claims ‘secret’ profits were ‘fully permitted’

Arch Financial Products has filed its defence against a £150m legal claim at the High Court, stating that it did not commit any breaches of duty in relation to the Arch Cru Guernsey cells and disputing allegations over “secret profits” on the basis fees were “explicit” and “fully permitted”.

In December, SPL Guernsey, the manager of the Arch Cru Guernsey cells, submitted the claim at the High Court alleging that Arch Financial Products breached fiduciary duties in running the funds during the period July 2007 to November 2009.

The particulars of claim, seen by FTAdviser, also allege that the firm took £5.4m in “secret profits”. The suit includes eight sub-claims based on the various investments that were made by Arch within the funds.

In April 2012 SPL Guernsey launched a separate £26m litigation action against Mr Farrell, CEO of Arch Financial Products, also regarding alleged unlawful “secret profits”, comprising of £20.6m in alleged losses suffered by the cells and £5.5m damages in relation to an investment in a property venture that is said to have generated £3.6m for Arch.

In it’s defence to the £150m claim, which has been filed with the High Court and which FTAdviser has seen, Arch denies the allegations and disputes that the claimants “are entitled to any relief whether as claimed or at all”.

The defence says that the investments were properly disclosed and were “demonstrably” successful prior to the global financial crisis.

The court filing also alleges that the basis of many of the allegations contained in the particulars of claim are “factually incorrect”, including all of those relating to “secret profits”.

In its claim SPL Guernsey accuses Arch of making a gain by arranging for six of the cells to invest a total of £26m into property company Lonscale Ltd after being introduced by Lee Barkman, director of Foundations Capital Ltd. The funds were used in part to finance the acquisition of Club Easy Group, which owned and operated student accommodation.

SPL Guernsey alleges that Arch made “secret profits” of £3m and arranged for Foundations Capital to receive £3m, of which a further £600,000 was returned to Arch, according to the claim.

The defence says that it was agreed in August 2007 that Arch would receive fees representing 50 per cent of the difference between the acquisition price and the value of Club Easy Group, which was purchased at a discount, limited to an overall limit of £6m.

It adds that Arch received £3m, but that the fees were “explicit” and “fully permitted”.

The defence says: “The IMAs [investment management agreements between Arch and the Guernsey cells] expressly provided that Arch might receive profit, commission or remuneration in connection with the transactions entered into on behalf of the relevant cell.

“[They also] provided that Arch would not be required to account for such profit, commission or remuneration or have its remuneration payable under the IMA abated except to the extent that this was agreed between Arch and the relevant cell.

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