Near Xanadu did Chris Ruffle a stately pleasure dome decree, but for his fraud, a fine was brought “Success for the SEC!”
The Financial Services Authority (together with the U.S regulator, the Securities and Exchange Commission (“SEC”)) has fined asset manager, Martin Currie Investment Management Limited (“MCIM”), a total of £8.6 million for failing to deal with a conflict of interest between two of its clients, leading to a finding of corporate fraud in the US.
In this latest high-profile incidence of international financial services fraud, the fine imposed by the FSA and the SEC concerned the misuse of millions of dollars of investors' money to bolster ailing investments managed by the UK company.
Fines and wines
The FSA reported that it had fined the Scotland based company £3.5 million, which is the largest fine ever imposed in a conflict of interest case.
Mr Ruffle, who grows wine at his Chinese castle, was responsible for managing the funds when the transactions took place. In April 2009, MCIM, operating out of its Shanghai office, advised China Fund Inc, a U.S. publicly traded fund client, to invest circa £15 million in an unlisted bond, issued by an offshore Chinese firm. The true purpose of the investment was to rescue a second Chinese hedge fund client that was facing serious liquidity difficulties. Both funds were managed by MCIM’s Shanghai office.
According to the FSA, the investment halved in value during the course of the subsequent two years. The regulators’ investigations revealed that MCIM failed to ensure the bond's valuation was properly scrutinised at the time that China Fund Inc made the investment.
MCIM neglected to ever disclose the full nature of the transaction to its clients. The sums were then used to meet redemption requests from separate clients which were concerned by the poor performance of their investments.
The SEC, which has indicated that its own investigation is still under way, described the action by MCIM as "fraudulent". The FSA said it amounted to a conflict of interest in the UK.
In attempt to address the misdemeanours perpetrated by its Shanghai office and in an effort to mitigate the penalties faced, it is understood that MCIM self-reported the matter to the FSA. MCIM co-operated with the investigation and has also ensured that its client has been reimbursed for all losses suffered.
"Following our comprehensive review, significant improvements have been made to our business including reinforcements to our governance function, changes to our management team and closing the unit down," Willie Watt, chief executive of MCIM.
Chris Ruffle’s blossoming career may have reached its nadir, but what lessons can be learnt from the conduct of the FSA? How can investor clients be sure of the trust placed in their advisers’ hands? How can investment managers recapture the innocence and probity, which has been left tarnished by market participants like Ruffle? According to Robert Khuzami, director of the SEC’s enforcement division:
“The misconduct in this case strikes at the heart of the fiduciary relationship between an investment adviser and its client. Advisers must treat each client with undivided and disinterested loyalty, and must make full and fair disclosure of all material conflicts of interest”
The FSA identified that MCIM’s problems arose from deficiencies in its checks and controls around unlisted investments, which it no longer includes in its portfolio.
This transaction gave rise to an obvious risk of a conflict which was identified much too slowly and managed in a wholly inadequate fashion.
Mark Kenkre, co-head of Cobbetts LLP’s Fraud & Risk Services Team believes that organisations cannot rely on the excuse misconduct stemming from rogue employees, “The principal responsibility for making sure an organisation observes its regulatory obligations rests with the organisation itself”. It is incumbent on the management to ensure adequate checks and balances are implemented to manage conflicts.