Investment services company Finco Treasury Management yesterday claimed the interests of its clients have been ‘greatly damaged’ by a series of related companies – La Valette Funds SICAV, Valletta Fund Management Ltd, Valletta Fund Services Ltd, Bank of Valletta plc and Insight Investment Management (Global) Ltd of Britain.
Finco claimed it invested in the La Valette Multi Manager Property Fund on the basis of the Offering Document which when the Fund was set up on 13 September 2005 stated as its Investment Restrictions:
The Fund may invest up to 20 per cent of its Net Asset Value in any one real estate property fund provided that this limit may be raised to 30 per cent for one of the real estate property fund in which it invests.
The Fund will, at any time, maintain exposure to at least five real estate property funds which may be of a closed ended and/or of an open ended nature.
The Fund may invest up to 10 per cent of its Net Asset Value in any one or more unlisted closed ended real estate property fund/s.
The Fund may not itself engage in gearing as part of its investment policy. However, the Fund may, at any time, borrow up to 10 per cent of its Net Asset Value to meet short-term liquidity and cash flow requirements.
The limit on the level of gearing that the Fund’s underlying real estate property funds may be exposed to is of a maximum of 100 per cent of their respective net assets.
Finco said that as a ‘multi-manager fund’ or ‘fund of funds’ which invests in the international property sector, the SICAV, managed by VFM as manager and with Insight as sub-investment advisor of VFM, is expected to invest the Fund’s assets with prudence and diligence in the best investments funds in the sector, that is those that are considered as ‘best in class’ both as regards their superior financial performance, their management by professionals of excellent repute who satisfy the highest criteria of honesty and integrity, that is persons who substantially satisfy the ‘fit and proper criteria’ to be entrusted with the Fund’s investments.
But the situation today, Finco added, is that redemptions in the Fund have been suspended since 7 August 2008 when the published net asset value was €1.071 per share, while the latest indicative estimate of the Fund as provided to investors last month indicated that the Net Asset Value has been reduced to €0.5188 of which only €0.2697 per share may be redeemed with effect from the latter part of this month. As a result, Finco said, it has suffered and is continuing to suffer ‘very substantial damages’.
Finco claimed that the SICAV and VFM as director and manager of the SICAV failed significantly to exercise the diligence required from them in the choice of investments for the Fund as well as in subsequent monitoring and management. These faults were among the principal reasons for the huge damages sustained by the company, independently of any negative trend in the property market.
Among these investments, a number of funds were managed by the Belgravia financial services group of Jersey, which group and/or persons connected to it, as reported in the international media between 2003 and 2009 were involved with a number of ventures that failed, such as Glow Telecom, Unofon, and Fix Telecom, as well as some very dubious investments such as Munto Finance. There was also negative publicity in the UK press connected to Belgravia’s takeover bids of Newcastle and Notts Co football clubs which were not approved by the English FA because of lack of transparency, and also judicial cases of fraud in which were involved people associated with Belgravia.
Finco also stated that the SICAV and VFM as director and manager of the SICAV failed to inform the investors of the Fund, including Finco, about all developments relating to the Fund’s investments and its financial state in breach of their duties and obligations including that as fiduciaries they act in the utmost good faith.
One of the most important investments of the Fund was in funds managed by Belgravia Financial Services Group. On 2 September 2008, the Jersey regulator, the Jersey Financial Services Commission, issued a statement in which it announced that “Whilst the Commission’s investigation under the Financial Services (Jersey) Law 1998 continues into the affairs of Belgravia Financial Services Group Limited, a criminal investigation has now been commenced by the Joint Financial Crimes Unit of the States of Jersey Police. Senior members of the management team at Belgravia have been removed and replaced by the shareholder, Barclays Private Bank and Trust Limited, who hold the shares as trustee. Deloitte are assisting the trustee in the ongoing affairs of Belgravia.”
On 5 September 2008, JFSC issued another official press release with reference to Belgravia Fund Managers and a number of funds managed by them (Belgravia Atherstone Funds PCC, Belgravia European Property Funds Limited, Belgravia Funds PCC, Belgravia Gold and Resources Fund LP, Belgravia IFN Funds PCC and Belgravia Property Funds Limited [‘Suspended Funds’]) that the
regulator was worried that:
“ a) each of the suspended funds are currently without adequate or effective management or financial or accounting controls in place; and
b) the true and correct value of the investments or other assets of the suspended funds cannot currently reasonably and reliably be ascertained by the Belgravia Fund Managers.”
Meanwhile, Deloitte & Touche were also reported to have come to the conclusion on the basis of their investigations into the financial affairs of the Belgravia Group that at least part of this group was insolvent and that there were suspicions of fraud.
Finco claimed that even after they came to know of such significant and worrying facts, the SICAV and VFM as director and manager of the SICAV misled investors in the Fund and failed to inform them fully of all relevant developments in relation
to Belgravia, in an honest and
transparent manner.
While the Directors’ Report in the Annual Report dated 8 January 2009 for the financial year ending on 30 September 2008 makes no reference to the negative events referred to above, VFM in its manager’s report in the same Annual Report limited itself to the following: “The La Valette Multi Manager Property Fund is also invested in the Belgravia European Property Fund, Belgravia IFN China Property Fund and Belgravia European Logistics Fund which are temporarily managed by Deloitte & Touche LLP. These funds continue to be suspended however there have been a number of positive developments. Two Extraordinary General Meetings were held on 19 and 26 November 2008 and directors have been appointed for the three funds. In the case of the Belgravia European Property Fund and the Belgravia European Logistics Fund, the directors are in discussion with prospective new managers for the funds, and it is anticipated that a second EGM will be held in January 2009 seeking approval of the preferred candidate. It is also the current intention of the directors to call an EGM for the Belgravia PCC China Fund during the first quarter of 2009 to obtain shareholder approval to sell the sole property of this fund, implying that the La Valette Multi Manager Property Fund would be in a position to liquidate its holding and inject liquidity into the Fund.”
Finco pointed out that while VFM stated that the Belgravia funds were being ‘temporarily managed’ by Deloitte & Touche LLP, it failed to disclose that Deloitte & Touche was acting as a liquidator appointed by the Jersey court.
Nor do the companies involved especially VFM communicate to investors in the Fund that the JFSC had suspended the Belgravia funds because “the suspended funds are currently without adequate or effective management or financial or accounting controls in place” or that the true and correct value of the investments or other assets of the suspended funds cannot currently reasonably and reliably be ascertained by the Belgravia fund managers”.
Instead, in the 27 October 2008 circular VFM let Finco and the other investors understand that the temporary suspension in trading in the Belgravia funds happened “following the recent death of Duncan Hickman, founder and chairman of Belgravia”.
And in the manager’s report in the Annual Report dated 8 January 2009 and in the 19 February 2009 circular VFM spoke of ‘positive developments’ without disclosing that “senior members of the management team at Belgravia have been removed” and without disclosing that a criminal investigation was taking place apart from the JFSC investigation. On the contrary, in its 5 January 2009 circular VFM reported that “there are no significant developments to report in the underlying investments other than those already communicated to you in our letter of 27 October 2008”.
In the light of all the information in VFM’s possession, including the fact that there was a criminal investigation regarding Belgravia and that there was serious doubt about the value of the affected assets, Finco claimed, VFM misled it and the other investors when it led them to understand that “the La Valette Multi manager Property Fund would be in a position to liquidate its holding and inject liquidity into the fund”. This forecast has transpired to be completely baseless and illusory with investors in the Fund in the pitiful position of possibly being able to recover in cash by the end of this month an estimated price of €0.2697 per share when the pre-suspension price of two years ago
hovered around €1.13 per share.
Besides, Finco claimed, the SICAV and VFM as director and manager of the SICAV, VFS and BOV failed in their duty to abide by and comply with the terms and conditions of the Investment Restrictions in the Offering Document and the licence of the Fund, including the Standard Licence Conditions and the PlF Rules.
The very high level of gearing of one particular Belgravia fund, the Belgravia European Property Fund, was amongst the primary causes that led to the massive financial losses of the Fund. According to the audited accounts of the Belgravia European Property Fund for the financial year which closed on 31 December 2006 published on 11 January 2008, that is seven months before the SICAV suspended trading and redemptions in the fund, the gearing ratio (loans and other liabilities compared with the net assets) of the Belgravia European Property Fund was at least 208 per cent. This ratio is much higher than the 100 per cent gearing ratio allowed by the Investment Restrictions of the Fund. According to the financial statements, which were significantly qualified by the auditors, for the financial years which ended on 31 December 2007 and 2008 respectively, published on 8 January 2010, the gearing ratio of the Belgravia European Property Fund continued to deteriorate to at least 260 per cent and 1286 per cent for the respective years, that is 13 times that allowed by the Investment Restrictions referred to above.
Finco added that both VFM and VFS confirmed to it that two other funds managed by Belgravia where the Fund made high value investments – the Belgravia IFN China Property Fund and the Belgravia European Logistics Fund – have never so far published any audited accounts.
It is clear, Finco added, that when the Fund made huge investments worth many millions of Euro, it could not have in its possession ‘clean audited accounts’ of the companies it invested in. This, Finco added, is a further proof of lack of due diligence on the part of the SICAV and VFM as director and manager of the SICAV, and on the part of Insight as sub-advisor of VFM.
Finco further added that in the case of the Belgravia European Property Fund, BOV could easily have exercised its monitoring duties in terms of law in relation to the underlying investment fund’s gearing and report this breach of the Prospectus and Licence Condition to MFSA and to investors, but failed to do so.
For all this manifest breach of the Investment Restrictions in the Offering Document and the fund’s licence, Finco blames the SICAV and VFM as director and manager of the SICAV, including VFS as a delegate of VFM, all of whom together are responsible for the management and the general supervision of the Fund’s investments in the context of the Investment Restrictions referred to above.
Finco also blames BOV as custodian which in so far as it is specifically duty-bound to “monitor the extent to which the manager is abiding by the investment and borrowing powers laid out in the Offering Document and otherwise in accordance with the provisions of the Constitutional Document of the Scheme and the Licence Conditions.”
Finco claimed that BOV as custodian of the fund acted negligently, without necessary skill and care and in flagrant breach of its obligations in so far as it failed to supervise and monitor the Fund’s compliance with the Investment Restrictions specified in the Offering Document and in the Fund’s licence in relation to the Fund’s investment in the Belgravia European Property Fund, by failing to take immediate action at least after the publication of the audited accounts of the Belgravia European Property Fund on 11 January 2008 in order to ensure that the breach of the Investment Restrictions is rectified, and that investors in the fund, including Finco, are informed of the said breach of the Investment Restrictions to allow investors to make their own informed investment decisions.
Finco additionally claimed that moreover BOV, instead of reporting the breach, gave a completely false and incorrect picture of the state of affairs of the Fund by issuing a certificate dated 29 November 2007 contained in the SICAV annual report for the financial year which ended on 30 September 2007 as well as another certificate dated 8 January 2009 for the financial year which ended on 30 September 2008 where BOV as custodian certified that the Fund was in compliance with the relative Investment Restrictions, namely that: “We Bank of Valletta plc as Custodian to the La Valette Funds SICAV plc hereby confirm that having enquired into the conduct of the manager during the year ended 30 September 2007 / 2008, it is our opinion that during this period, the company and each of its funds have been managed:
In accordance with the limitations imposed on the investment and borrowing powers of each fund by the constitutional documents and by the Malta Financial Services Authority; and
In accordance with the provisions of the Constitutional Documents and each fund’s licence conditions.”
Finco further claimed that BOV persisted in its failure to fulfil its legal obligations and responsibilities by re-issuing the same clean certificate for the third time dated 12 January 2010 confirming once again that the Fund was compliant during the financial year which ended on 30 September 2009.
Finco added that BOV proceeded to issue a ‘clean’ custodian certificate despite the absence of reliable information (for example, clean audited accounts) in relation to the Fund’s investments in the Belgravia IFN China Property Fund as well as the Belgravia European Logistics Fund upon which to ascertain the Fund’s compliance with its investment restrictions in relation to its underlying funds in satisfaction of its responsibilities.
Finco added that the unavailability of clean audited accounts for the last two mentioned Belgravia funds does not absolve SICAV and VFM as director and manager of the SICAV, VFS, Insight and BOV from ensuring that they adhere to and perform their obligations in terms of law in relation to the Investment Restrictions of the Fund. On the contrary, the unavailability of clean audited accounts should have served to put them on notice and consequently to be more vigilant in ensuring compliance with the relative Investment Restrictions.
Finco added that it would not have invested in the Fund had it been made aware that the level of gearing of the underlying funds in which the Fund was invested would be exceeding the maximum limit of 100 per cent, contrary to the Investment Restrictions of the Fund according to the Offering Document.
In conclusion, Finco said that as a result of all this it has suffered damages. It claimed the companies (La Valette Funds SICAV plc, Valletta Fund Management Ltd, Valletta Fund Services Ltd, Bank of Valletta plc and Insight Investment Management (Global) Ltd) had already been called upon to compensate it with respect to the damages suffered, but respondents have remained in default.
So, for all the above reasons, Finco was charging the SICAV to immediately take all necessary action to protect and safeguard the interests of the investors in the La Valette Multi Manager Property Fund, including by taking any legal action necessary against the persons responsible for the management and administration of the Fund and those responsible for the care and custody of the investments of the Fund, including adherence to the terms and conditions included in the Offering Document and the licence conditions of the Fund.
At the same time, Finco called upon the respondents to come forward within one week for the liquidation and payment of the damages suffered by Finco as a consequence of the negligence, lack of skill, care and diligence, and the breach of their responsibilities, including their fiduciary duties, and their failure to abide by the terms and conditions of the Offering Document and the licence conditions of the Fund. It also holds them responsible for any ulterior damages it may sustain.
The judicial protest in the First Hall of the Civil Court was presented yesterday and was signed by Professor Ian Refalo. The protest is also being notified to the chairman of the Malta Financial Services Authority.