Finco Treasury Management Ltd (Finco) yesterday expressed “great satisfaction of the publication by the Malta Financial Services Authority (MFSA) of sanctions in relation to the La Valette Multi Manager Property Fund (Property Fund)”.
In a lengthy and technical statement, Finco said the MFSA published its decisions on the first and most important of the three lines of investigation, namely the question of whether the Property Fund has breached its Prospectus Investment Restrictions relating to exposure to gearing in underlying investments of the Property Fund. Finco said the MFSA decision vindicates the beliefs of Finco and Buttigieg Refalo Zammit Pace & Associates, lawyers, relating to this issue, first made in July 2010, corroborated with documentary evidence of fact (such as the offering documents and the audited accounts of same underlying funds) and principles of law and jurisprudence relating thereto.
Finco said the MFSA in a landmark regulatory decision, the first of its kind in Malta, has imposed a record fine of €149,821 on Valletta Fund Management Ltd (VFM) for failure to act with the level of care and diligence required to conduct their Fund Management business and for having wrongly applied the complained-of gearing restriction laid in the Prospectus and which prohibits the Property Fund from investing in underlying funds with a leverage of more than 100% of net assets, being total assets less total liabilities. They were also found to have failed to properly monitor its delegates, Valletta Fund Services Ltd and Insight Investment Management (Global) Ltd with regards to the proper application of the Prospectus Investment Restrictions. They were also found to have failed to maintain adequate records.
The MFSA has also issued an even higher fine against BOV qua custodian for the Fund for €197,995. BOV was found to have failed to act with the level of care and diligence required of licence holders in the conduct of custodian business. BOV was found to have wrongly applied and wrongly monitored the application by others of the gearing investment restrictions laid in the Fund Prospectus. They were found to have failed to make accurate reporting in the Fund’s annual Financial Statements for the period ending 30 September 2006, 2007, 2008 and 2009. They also failed to maintain sufficient records.
The gearing restrictions contained in the Prospectus are clear, objective and unequivocal. BOV ought not to have challenged Finco, the investors and the MFSA in such manifest circumstances of wrongdoing, causing unnecessary hardship to its clients, the Bank itself and Malta’s financial services industry. Instead BOV has only attempted to defend that which is indefensible and engaging in derogatory language against the leaders and advisors of dissenting investors in an attitude not befitting a dignified and professional bank management.
Other major causes of losses to the Fund are grossly incorrect valuations of Fund prices per share at which redemptions were made in 2008, estimated at circa €12 million. There are also VFM and BOV charges to the Fund made at grossly inflated value of investments. This is besides losses caused directly to many investors as a result of alleged mis-selling the Fund to non-experienced investors. The aforesaid, together with allegations of improper use of price-sensitive information not in the public domain by insiders, are the subject of a 2nd and 3rd MFSA investigation yet to be concluded.
The decision of the MFSA confirms the thesis of the investors in the Property Fund that they were not provided with the Fund that the Prospectus purported to offer, but with an investment product with altogether different specifications in terms of risk and return.
Investors would not have invested in the Fund if they knew that the level of gearing of the underlying funds in which the Fund intended to invest, or indeed had already invested, could exceed the maximum of “100% of their respective net assets”, contrary to the investment restrictions made in the Property Fund Prospectus.
For this reason, BOV and the other Functionaries (including the Sicav directors) have failed in their legal duties towards investors. They are liable to pay redress and as far as possible restore the consumer back in the position they would have been had it not been for BOV and other Functionaries’ acts and omissions, and this by way of refund of capital cost and interest (position status quo ante).
This is a principle that has been consistently applied in both civil as well as common law jurisdictions. Specifically in the field of investment compensation in the last few years, other EU jurisdictions, whether Courts or Tribunals or Administrative Review Tribunals or Ombudsman Services, have invariably adopted this practice, including awards of interest. Suffice it to say that there have been at least 10 publicised cases earlier on this year where the UK Financial Services Authority or the Financial Services Ombudsman has in cases of bank wrongdoing, whilst fining the banks, also ordered compensation to investors with interest, and all banks have acted honourably, accepting with grace the decision and apologising profusely to clients. BOV, it appears, does not belong to this generation of EU banks because its offer clearly falls short of the investors’ legitimate expectations. It is hoped that this hard-headedness and intransigence, continuing today even after the MFSA published its findings, will come to a halt soonest possible.
Finco said that now is the time for all parties involved, be it the MFSA, BOV, the government, the political parties and investors to act according to their legal and moral responsibilities, each in its own sphere.
In the face of the MFSA’s findings, Finco said it expected that the Bank will live up to its legal and moral responsibilities and treat investors fairly. It said it sincerely hoped that BOV will close this “unfortunate chapter and lay the matter to rest, the sooner the better, for the sake of the aggrieved investors, the Bank itself and the Maltese financial services sector generally.”