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Firm recently fined by FSA is market maker for Arch cru cells

Fined share trader Winterflood Securities is the market maker for the Arch cru Guernsey investment cells, it has been revealed.

In correspondence to advisers, released today, cru founder Jon Maguire also highlights a “complete breakdown” between cru and ARCH’s managing partner Robin Farrell and head of fund platforms Robert Addison.

Winterflood Securities was fined £4m in July 2008 after two of its traders were found guilty of committing market abuse. The decision was upheld by the Financial Services and Markets Tribunal last week.

Maguire says he does not believe this was a contributory factor to the funds’ problems.

He says the turbulent market events of October 2008 and the liquidity freeze that has followed has meant that the valuation point has been dislocated.

He says that Capita is now in the unenviable position of valuing the Guernsey cells and the ARCH cru fund range.

He says: “Until suspension, the pricing of the funds was based on the listed price on the CISX of the Guernsey cell companies and cash on deposit. Winterflood Securities are the market makers and you only have to phone them up to see the problems – there is no secondary market and the likelihood is that the moment the ARCH cru funds became cash negative i.e. outflows exceeded inflows, the only ongoing buyer of the Guernsey cell companies had withdrawn i.e. ARCH were no longer able to continue to support the share prices.

“ARCH have consistently stated that the relationship between net asset value and the listed share price was extremely close. Clearly, the share prices are offering a daily price, yet many of the underlying holdings are only priced monthly e.g. third party finance funds.”

Cru says that it expects no regulatory breach but has called on ARCH and Capita to come out and says what the position is with regard to the underlying assets.

Maguire says that that cru maintains a strong relationship with ARCH chief investment officer Michael Derks and will continue to back the business as long as he stays with the firm.

“If he leaves, then our advice to all investors is to seek the removal of ARCH as investment managers and we will encourage Michael to establish a new investment firm to take over management of the ARCH cru funds. We have had absolutely no discussions with Michael on this. “

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