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By Donia O'Loughlin | Published May 16, 2012

Arch CEO says £26m legal claim is ‘without foundation’

Robin Farrell, chief executive of Arch Financial Products, the former manager of the Arch Cru funds, has filed a defence against a £26m legal claim in the High Court, saying the allegations made against him are “without foundation”.

In April, SPL Guernsey, the manager of the Arch Cru Guernsey Cells, accused Mr Farrell of breaching his fiduciary duty by allowing Arch Financial Products to receive a total of close to £3.6m as part of a £6m “secret profits” deal, in a claim at the High Court.

The litigation followed an earlier £150m claim against Arch Financial Products itself in December 2011 on similar grounds, in which SPL alleged that Arch Financial Products breached fiduciary duties in running the funds during the period July 2007 to November 2009.

The claim against Mr Farrell, brought by SPL on behalf of the six sub-funds it manages, is seeking up to £26.1m, comprising of £20.6m in alleged losses and £5.5m damages, over allegations that Arch invested heavily in a property venture with another firm that generated £3.6m of profits for the firm.

In Mr Farrell’s defence to the claim, which has been filed at the High Court, he denies the allegations and that the claimants are “entitled to any relief whether as claimed or at all”.

SPL Guernsey’s claim 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.

Mr Farrell’s defence says that Arch received £3m in respect of fees for acting in relation to the transaction, but that these fees were in the original contract and were permitted.

In its claim, SPL said that the cells did not authorise either of these payments, but Mr Farrell denies this stating that the investment management agreement between the cells and his firm meant that Arch was not liable to account for any profit, commission or connected transactions.

Mr Farrell also denied that by purchasing the Lonscale notes, Arch breached its duty. The defence said that these investments were permitted under the terms of the relevant IMAs and “were reasonable for the cells to enter into”.

The defence says: “At all material times Mr Farrell believed that Arch was acting in accordance with the duties under the IMAs.”

Earlier this month, Arch Financial Products 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”.

SPL Guernsey declined to comment.

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