UK, US Regulators Fine Martin Currie Over Conflict Of Interest

Max Skjönsberg

10 May 2012

Martin Currie, the UK-based fund manager, has been heavily fined by the financial services regulators in the US and the UK for failing to manage a conflict of interests between two clients.

The £3.5 million penalty is the largest ever imposed by the UK Financial Services Authority in a conflict of interest case. Additionally, the Securities and Exchange Commission has fined Martin Currie $8.3 million for similar failings.

The FSA said in a statement that the firm caused one client, referred to as Fund B, to enter into a transaction described as ill-advised which is deemed to have rescued another client, called Fund A, from serious liquidity concerns.

The SEC identified Fund B as a US publicly-traded fund called The China Fund.

“In April 2009, Martin Currie caused Fund B to invest around £15 million in an unlisted bond issued by an offshore Chinese firm,” the FSA said. “Martin Currie failed to ensure that the bond’s valuation or the rationale behind the investment were properly scrutinised at the time of the transaction, and it proved to be a poor investment for Fund B, halving in value over the next two years.

“The transaction gave rise to a clear conflict of interest between Fund A and Fund B,” the regulator said. “Martin Currie was slow to identify this point and failed to manage the conflict fairly. Martin Currie did not disclose the conflict to Fund B and failed to ensure that Fund B understood that the transaction proceeds would be used to repay an investment made by one of Martin Currie’s other clients.”

“The China Fund's board was led to believe it was making a routine investment in a Chinese company,” said Bruce Karpati, co-chief of the SEC's asset management unit. "But in reality, the investment proved harmful to fund shareholders while sparing an affiliated hedge fund from its own problems during the financial crisis."

Martin Currie said in a statement that unlisted investments accounted for less than 1 per cent of the firm’s total assets under management and was a specialist part of its business which has now been closed down. The firm also stressed that it self-reported the matter to both regulators before commencing a detailed internal review which it later shared with the two regulators.

The FSA said that many of Martin Currie’s failings resulted from weaknesses in its systems and controls around unlisted investments. The regulator said in a statement that the firm’s misconduct breached FSA Principle 2 , Principle 3 and Principle 8 .

Martin Currie settled early with the FSA and received a 30 per cent discount on its fine, the FSA said.

Martin Currie had not commented to WealthBriefing on the matter at the time of publication.