Investments  

Arch Cru decision exposed ‘regulatory arbitrage’

A judgement handed down against the former Arch Cru manager and its CEO is a “devastating critique” and displayed the way products were sold to UK investors through a process of “regulatory arbitrage”, according to the new manager of the funds’ Guernsey cells.

In his judgement, handed down yesterday (18 December), the judge ruled against Arch Financial Products chief executive Robin Farrell after finding him guilty of guilty of dishonesty and his firm of negligence.

The judge also made an order for damages in excess of £22m, plus interest and costs. Permission to appeal was refused, although Mr Farrell vowed to take his case to the Court of Appeal on the grounds that there was no specific evidence of wrongdoing presented.

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SPL had initially sued for £150m, alleging Arch had been grossly negligent in its role as investment manager of the funds between 2007 and 2008.

In a statement issued today by SPL’s chairman Hugh Aldous said the “exhaustively detailed judgment” is not only a devastating critique of Arch and Mr Farrell, “but is an exemplary commentary on fiduciary duties” that is of contemporary relevance for investment managers.

He said: “This action has taken a number of years to bring to trial and has been fought against considerable obfuscation.”

Mr Aldous went on to state that the sale of funds from a jurisdiction outside of the UK through a UK regulated firm was an example of “regulatory arbitrage”. Advisers hit by an enforced past business review have previously criticised the apparent authorisation bestowed on the investments.

Mr Aldous stated that the SPL board of directors remains in close contact with the All Party Parliamentary Group of MPs representing many UK investors and it continues to pursue other parties.

The ICC and Guernsey cells who brought the action were part of a structure, established by Arch, through which investors in the UK invested, primarily through open-ended investment companies in the Arch Cru funds that were marketed to them by financial advisors, Mr Aldous added.

In excess of £500m was invested and the Financial Services Authority’s decision notice in September 2012 - which is currently under appeal to the Upper Tribunal with judgment awaited - found that Arch breached regulatory principles and “recklessly failed to manage conflicts”.

The ICC and the Guernsey Cells appointed new directors at the end of December 2009, who began to investigate the investments they had inherited. On 21 December 2011 a claim was issued against Arch, followed by a claim against Mr Farrell personally on 16 March 2012.

The cells’ claim against Mr Farrell and Arch were joined together and selected to be tried first, commencing in November 2013 and concluding yesterday.

The Arch Cru funds were suspended in March 2009 by the Financial Services Authority after pricing and liquidity problems forced them out of trading. This is the first of many litigation actions launched by SPL as it attempts to recover Arch Cru losses.

peter.walker@ft.com