Scottish fund manager Martin Currie was fined $8.3 million by the SEC and $5.6 million by the U.K’s Financial Services Authority for causing a U.S. publicly-traded advisory client, The China Fund, Inc. (China Fund), to make an unfavorable investment in bonds in order to prop-up another advisory client, the Martin Currie China Hedge Fund, a U.S. closed-end fund (Hedge Fund).
The Hedge Fund had purchased $10 million of illiquid bonds issued by Hong Kong-based Jackin International. The Hedge Fund got into trouble during the financial crisis when it faced an increase in redemption requests from investors, while, simultaneously, Jackin became unable to service the bonds. To alleviate the Hedge Fund’s problem, Martin Currie steered the China Fund to invest $22.8 million in bonds issued by a Jackin subsidiary, $10 million of which was, in effect, used to redeem at par the bonds held by the Hedge Fund. The China Fund sold the bonds it had purchased from the Jackin subsidiary two years later for about an $11.5 million loss.
According to the SEC, Martin Currie was aware of the conflict of interest and purported to cure it by seeking approval from the China Fund’s board of directors. Martin Currie, however, neglected to disclose that the proceeds of the China Fund’s investment would be used to redeem bonds held by another investment advisory client and other relevant facts. The SEC’s Director of the Division of Enforcement stated that the sanctioned conduct “strikes at the heart of the fiduciary relationship between an investment adviser and its client” and issued the following warning:
“Advisers must treat each client with undivided and disinterested loyalty, and must make full and fair disclosure of all material conflicts of interest.”