On May 10, the UK Financial Services Authority (FSA) announced that it fined Martin Currie Investment Management Limited and Martin Currie Inc (together, Martin Currie) £3.5 million (approximately $5.5 million) for conflict of interest failures. This is the largest fine ever imposed by the FSA in a conflict of interest case. The Securities and Exchange Commission has taken separate enforcement action for similiar failings in respect to the same facts and a civil penalty of $8.3 million has been imposed on Martin Currie under an agreed settlement.
The FSA found Martin Currie to have breached FSA Principle 2 (skill, care and diligence), Principle 3 (management and control) and Principle 8 (conflicts of interest). Martin Currie caused one client (Fund B) to enter into a transaction which rescued another client (Fund A) from serious liquidity concerns. Both Fund A and Fund B were managed by the same Martin Currie fund managers located in its Shanghai office.
The FSA found that:
- In April 2009, Martin Currie caused Fund B to invest around £15 million (approximately $24 million) in an unlisted bond (the 2009 Bond) issued by a Bermuda incorporated entity located in China. Martin Currie failed to ensure that the valuation of the 2009 Bond and the rationale behind Fund B’s investment were properly scrutinized at the time of the transaction. The 2009 Bond proved to be a poor investment for Fund B. It was sold in April 2011 at a loss of approximately 50%.
- While the investment in the 2009 Bond was detrimental to Fund B, it had significant advantages for Fund A. In April 2009, Fund A was facing serious liquidity problems due in part to its exposure to illiquid investments in an affiliate of the issuer of the 2009 bond. Fund A’s liquidity problems were solved by Fund B’s investment in the 2009 Bond, because 44% of the proceeds of the 2009 Bond issue were used to redeem Fund A’s illiquid investment in the bond issuer’s affiliate. This in turn helped Martin Currie to avoid any reputational damage which may have arisen if Fund A’s liquidity problems had continued and it had been unable to meet pending redemptions by investors.
- Fund B’s investment in the 2009 Bond gave rise to a clear conflict of interest between Fund A and Fund B. Martin Currie was slow to identify this and failed to manage the conflict of interest fairly. Martin Currie did not disclose the conflict to Fund B and failed to ensure that Fund B understood that a substantial portion of the proceeds from the 2009 Bond would be used to repay an investment made by Fund A.
- Many of Martin Currie’s failings resulted from weaknesses in its systems and controls in relation to unlisted investments. In particular, poor oversight of the fund managers of Fund A and Fund B.
Tracey McDermott, FSA’s acting director of enforcement and financial crime, said: “Effective identification and management of potential conflicts of interest between clients is a core requirement for asset managers. This transaction gave rise to an obvious risk of a conflict which Martin Currie was slow to identify and then failed to manage adequately.”
Martin Currie settled at an early stage and therefore qualified for a 30% reduction in the financial penalty imposed by the FSA. Without the settlement discount the fine would have been £5 million (approximately $8 million). In assessing the penalty, the FSA also took account of the fact that Martin Currie brought the breaches to the FSA’s attention, co-operated fully with the FSA’s investigation and compensated Fund B for its investment losses. The FSA also acknowledged that Martin Currie had spent considerable time and resources investigating and addressing the FSA’s concerns.
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