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FCA versus Arch Financial: The key arguments

The FCA has kicked off its legal challenge against the fund manager behind the collapsed Arch cru range as it seeks to ban and fine the directors a total of £850,000.

The regulator opened its case against Arch Financial Products, Arch FP chief executive Robin Farrell and compliance officer Robert Addison last week.

The FSA published decision notices against Arch FP, Farrell and Addison in December 2012 seeking to issue a public censure against the fund manager and ban and fine Farrell £650,000 and Addison £200,000. The regulator said it would have fined Arch FP £9m, but the firm did not have sufficient resources.

All three parties referred their case to the Upper Tribunal.

In opening arguments made at the hearing in London last week, Monica Carss-Frisk QC, acting for the FCA, said: “The key question is a straightforward one: did they have arrangements in place to make sure conflicts were managed fairly and take steps to mitigate those conflicts? We argue they did not.”

The FCA’s case centres on four transactions between Arch FP and the Guernsey-listed cell companies that made up the Arch cru funds.

In one transaction, the cells invested in the parent company of Arch FP, in which Farrell was a major shareholder.

Addison and Farrell presented the business plan to the cell directors and Farrell was involved in valuing the parent company for the transaction.

In another transaction, a number of the cells provided a £20m loan to a firm – of which Farrell was a director – to enable it to make an acquisition. Arch FP took a £3m fee for arranging the transaction which the FCA says was not properly disclosed to the Guernsey cell directors.

Carss-Frisk said: “These transactions are striking examples of a serious failure to manage conflicts and a failure to act with integrity.”

She argued  inadequate arrangements were in place to manage the conflicts, and Arch FP maintained inadequate compliance records.

In some cases, the firm created documents after a transaction had taken place and back dated them.

Paul Stanley, QC, acting for Arch FP, Farrell and Addison, said there is no evidence to suggest the conflicts caused the cells to invest in any “crucially inappropriate transactions”.

He said formal policy documents cannot be considered alone when deciding whether Arch FP adeq-uately managed conflicts, and other material such as emails should be taken into account.

Stanley said: “In a small office where everyone knows what is going on, it is natural that the sort of record keeping you would have in a large organisation may not exist.”

Arch FP acted as fund manager of both the Arch cru funds and the Guernsey cells in which the funds were investing.

Carss-Frisk argued Arch FP failed to have a “Chinese wall” to formally separate the decision-making bet-ween the two.

As a result, she said non-public information about the Guernsey cells was accessible to everyone within Arch FP.

Stanley denied Addison was a decision maker in the four transactions, and said Farrell was only one decision maker of many.

Arch FP had assets under management of approximately £645m at their peak in September 2008, and earned around £42m between July 2006 and March 2009, when the fund range was suspended.

The Guernsey cells invested in assets such as private equity and alternative asset classes such as Greek shipping and student accommodation.

The case continues.

The key arguments

The FCA:

• Arch Financial Products, chief executive Robin Farrell and compliance officer Robert Addison failed to manage major conflicts of interest fairly.

• The firm failed to maintain adequate compliance records.

• The firm failed to appropriately separate decision making relating to the Arch cru funds and the Guernsey cells.

Arch Financial Products:

• Addison was not a decision maker in the key transactions, and Farrell was only one decision maker of many.

• Much of the firm’s compliance records were informal, which was appropriate for a small organisation.

• It would not have been possible to completely separate decision making between the Arch cru funds and the Guernsey cells.

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