Asset Management. Litigation and Regulatory Enforcement Newsletter. Contents. February 2015 FRANCE... 2 HONG KONG... 2 UK... 3 US...

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1 Asset Management Litigation and Regulatory Enforcement Newsletter February 2015 Simmons & Simmons Asset Management Litigation Group and Seward & Kissel provide specialist advice to investment and fund managers across the globe. Working closely with their market-leading non-contentious asset management and investment practices, they advise on a breadth of complex contentious issues within the sector. They look to provide clients with the benefits of a profound understanding of the sector and a wealth of experience. Contents FRANCE... 2 Asset manager fined by the AMF for conflict of interests issues and a series of regulatory breaches... 2 HONG KONG... 2 The conclusion of the Tiger Asia enforcement action... 2 UK... 3 SPL Private Finance v Arch Financial Products LLP [2014] EWHC 4268: a timely reminder of the potential liability of investment managers... 3 US... 4 Fallout continues from landmark insider trader decision... 4 GUEST SLOT: CAYMAN ISLANDS (Mourant Ozannes)... 4 The Cayman Islands Court of Appeal reverses earlier decision on directors' liability in Weavering... 4 This new newsletter brings together developments of interest to the sector from around Simmons & Simmons network of offices and Seward & Kissel, in the US. From time to time it also includes a guest slot. 1

2 FRANCE Asset manager fined by the AMF for conflict of interests issues and a series of regulatory breaches Eric Boillot eric.boillot@simmonssimmons.com Thierry Gontard thierry.gontard@simmonssimmons.com On 12 January 2015, the AMF sanctioned Raymond James Asset Management International ( RJAMI ), a French management company, as well as its CEO and one of its fund managers, issuing fines of Euros, Euros and Euros respectively. This case attracted media attention as the sanctioned fund manager, Mr Hervé Dreyfus, is the former wealth manager of Mr Jérôme Cahuzac (former Deputy Minister for the Budget who was charged for money laundering resulting from tax fraud in high-profile criminal proceedings which are still pending). In addition to his salary as a fund manager at RJAMI, Mr Dreyfus received significant fees (equivalent to five times his salary) from Reyl, a Swiss bank, for investment advisory services. The AMF enforcement committee concluded that Mr Dreyfus lost his independence as his own personal interest, and not his clients interests, guided his investment choices when investing their money in funds related to Reyl, and that he failed to report such conflict of interests to his employer. RJAMI was found to have an inefficient internal control system and procedures given its inability to detect such conflict of interests between its employee and Reyl. Other regulatory breaches were also identified, such as the purchase of gold on behalf of a client, the lack of KYC diligence, and the failure to select investments which accorded with the level of risk chosen by clients as defined in their management mandates. HONG KONG The conclusion of the Tiger Asia enforcement action Tom Fyfe Hong Kong tom.fyfe@simmonssimmons.com In October 2014, the Market Misconduct Tribunal ( MMT ) determined that Tiger Asia Management LLC and two of its senior officers, Bill Hwang and Raymond Park, engaged in market misconduct in Hong Kong. This was the first case directly presented to the MMT by the SFC. Formerly only the Financial Secretary could initiate proceedings in the MMT, but section 252A of the SFO, enacted in 2012, has given the SFC direct access to the MMT. Tiger Asia, Hwang and Park admitted they had engaged in insider dealing and market manipulation when dealing in the shares of Bank of China Limited and China Construction Bank Corporation in December 2008 and January The MMT made a cold shoulder order against Tiger Asia and Hwang, which bans them from dealing in securities in Hong Kong for a period of four years. A cease and desist order was also issued against Tiger Asia and Hwang as to any future conduct that would constitute insider dealing, false trading, price rigging or stock market manipulation. This concludes the Tiger Asia enforcement action, which has become the poster boy for the SFC s message that overseas investors should not think that they can commit market misconduct with impunity from beyond Hong Kong s borders. Unsurprisingly, the SFC's Executive Director of Enforcement, Mark Steward, did not pass up on this final opportunity to reinforce the message: The SFC will track down and take action against wrongdoers wherever in the world they may lurk. 2

3 UK SPL Private Finance v Arch Financial Products LLP [2014] EWHC 4268: a timely reminder of the potential liability of investment managers Robert Turner robert.turner@simmonssimmons.com Paul Baker paul.baker@simmonssimmons.com This case provides a timely reminder of the circumstances in which the liability of investment managers may arise, and a warning to firms who manage investments for third party clients to consider both the legal and regulatory risks involved. The High Court considered claims made against Arch Financial Products LLP ( Arch ), an investment manager, and Robin Farrell, the Chief Executive Officer of Arch. The claim was brought by 18 cells of the funds that Arch had managed, which were known as the Arch-Cru funds. The claims related to real estate investments, made on their behalf, in Club Easy, a student housing company. Between October 2007 and August 2009 the funds invested around 20 million in Club Easy, but only two years after the initial investment its value was written down to zero. The funds alleged that the acquisition was a scheme contrived by Arch to obtain money from the funds, and pointed to a structuring fee of 6 million, half of which was to be received by Arch. The claimants alleged that, by making the investments on that basis, Arch had acted: (i) in breach of fiduciary duty; (ii) in breach of contract; and (iii) negligently. The defendants argued that the claimants had agreed to the fee. Walker J held that: (i) the evidence that Arch FP committed the claimant cells to the investment in order to ensure the success of that extraction venture is overwhelming ; and (ii) the funds did not know that they were effectively paying 6 million of their investment to other entities. Walker J found that the 3 million paid to Arch could not properly be described as a structuring fee, as none of the money went towards costs incurred in carrying out the acquisition. Rather, he held that the sole purpose of that fee was to bolster the profit of Arch so as to make it look successful. Significantly, Walker J did not agree with the defendants assertion that Arch had disclosed the structuring fees and received the funds consent. That was due to inconsistencies in the defendants evidence, and also because the judge was sure that the funds would not have consented to the majority of the fees coming out of their own investment. If the cells had consented to the fees then this may have constituted a complete defence. However, it was held that the requirements to satisfy that test are onerous, and that Arch, as the investment manager, would have needed to have made full disclosure of all the material facts and the nature and extent of the firm s interests; whereas telling the funds late, and in an informal manner, did not achieve that. Mr Farrell was held to have dishonestly assisted in the investment manager s breach of duty and to have induced the investment manager to breach the contract by concocting the plan. The defendants were ordered to pay 22 million (excluding interest) plus costs to the claimants. On 19 January 2015, in a separate (but related) decision, the Upper Tribunal published its decision dismissing an appeal made by Mr Farrell (and another) against the regulatory fines and bans which had been imposed on them by the FSA (as it was at that time) in December 2012 based on their role in managing the failed Arch Cru funds. Herrington J found that there had been serious failings in the pair s conduct, which warranted the sanctions imposed by the regulator. 3

4 US Fallout continues from landmark insider trader decision Joseph Morrissey Jack Yoskowitz The prosecutors in continue to feel the fallout from the decision by the Second Circuit Court of Appeals in U.S. v. Newman. In that landmark case, the Appeals Court held that the government must prove that an insider was entrusted with a fiduciary duty; breached that duty by disclosing confidential information in exchange for a personal benefit; and that the tippee knew that the information was confidential and disclosed for a benefit. The tippee must then use the information for a benefit in a trade or a tip. It further limited liability by holding that the benefit cannot be mere friendship. Instead, the benefit must be a meaningfully close personal relationship that generates an exchange that is objective, consequential, and represents at least a potential gain of a pecuniary or similarly valuable nature. U.S. Attorney Preet Bharara s office is seeking a review of the decision by the entire Second Circuit panel. On January 22, 2015, a Southern District of Judge threw out the insider trading guilty pleas of four individuals in connection with an acquisition by IBM. The Judge in U.S. v. Condradt wrote: this court finds that, as indicated in Newman, the controlling rule of law in the Second Circuit is that the elements of tipping liability are the same, regardless of whether the tipper's duty arises under the classical or the misappropriation theory. GUEST SLOT: CAYMAN ISLANDS (Mourant Ozannes) The Cayman Islands Court of Appeal reverses earlier decision on directors' liability in Weavering Shaun Folpp BVI shaun.folpp@ Christopher Harlowe Cayman Islands christopher.harlowe@ Jeremy Wessels Guernsey jeremy.wessels@ Bruce Lincoln Jersey bruce.lincoln@ On 12 February 2015, the Cayman Islands Court of Appeal delivered its judgment in Weavering Macro Fixed Income Fund Limited (in Liquidation) v Stefan Peterson and Hans Ekstrom. The earlier Grand Court judgment attracted considerable attention by confirming that long established legal principles governing directors' duties applied to directors of Cayman Islands funds. The judgment contained some (largely obiter) comments regarding the practical steps that directors of Cayman Islands funds would often need to take in order to discharge those duties. The Court of Appeal held, however, that while Weavering's directors failed to meet the duties that they owed to the Fund, the evidence before the Judge in the Grand Court was insufficient to support a finding of wilful neglect or default against the directors, as a result of which the directors were entitled to rely on the exculpatory provisions in the Articles to relieve them of liability. Background Weavering Macro Fixed Income Fund Limited (the Fund ) collapsed in 2009, following the discovery that most of the assets on its balance sheet were fictitious. The Fund subsequently went into liquidation. Prior to its collapse, the Fund's management structure had been "entirely conventional" apart from the fact that its two independent directors, Stefan Peterson and Hans Ekstrom (the Directors), were close family relatives of the Fund's promoter and principal investment manager, Magnus Peterson. The liquidators' case against the Directors was that had they carried out the required high level supervision in accordance with their duties as independent non-executive directors, the fictitious nature of the assets would have been detected sooner and the Fund would not have continued to make redemption payments on the basis of, what later turned out to be, grossly inflated NAVs. 4

5 Unlike the position in England, and some other offshore jurisdictions, exculpatory clauses in Funds' Articles (which operate to contractually relieve directors of liability for their actions) are permissible in the Cayman Islands: most limit that protection to "carve out" liability attributable to the directors' fraud, wilful neglect or default. Weavering's Articles contained such a clause, which the Directors sought to rely upon to avoid liability. At first instance, the Grand Court had concluded that, because the directors knew that they had a duty of supervision but consciously chose not to perform it any meaningful way, they were guilty of wilful neglect or default. The Grand Court observed that they would have been protected by the exculpatory provisions had they failed to perform their duties as a result of their carelessness, no matter how gross; in other words that even if they had merely done their "incompetent best" they would have been protected. In consequence of the directors' total failure to perform their duties, the Grand Court made an award of damages against them of US$111 million, representing the minimum value of irrecoverable redemption payments made by the Fund during the extended period of its trading on the basis of falsely inflated NAV calculations. Grounds of Appeal The directors appealed the Grand Court judgment, particularly in relation to the finding that they had acted in "wilful neglect or default" of their duties, asserting that the Judge could not properly have reached that conclusion on the evidence put before the Court at trial. The liquidators applied for affirmation of the Grand Court decision on the directors' liability but on additional grounds. Court of Appeal Judgment While affirming the original findings of breach of duty by the directors, the Court of Appeal held that the exculpatory provisions in the Fund's Articles nonetheless operated to relieve the directors from liability for their actions (and inaction) in the discharge of their duties as directors and would do so unless it was demonstrated that their actions were so egregious as to amount to "wilful neglect or default" of their obligations. The Court of Appeal (Sir John Chadwick, President, presiding) held that the evidence available to the Grand Court in the earlier hearing was insufficient to support the finding that the directors' conduct amounted to "wilful neglect or default", and as a result, the directors were entitled to the protection of the exculpatory provisions. The Court of Appeal accordingly set aside the earlier judgments against the directors for $111 million. Conclusion The Court of Appeal's decision can, on one level, be read as simply a difference of opinion from the Grand Court as to the value to be attributed to the evidence which was before it. The Court of Appeal accepted that the directors had breached their duties, although the effect of the decision is that to establish liability on the part of directors who, like the Weavering directors, discharged their duties negligently or grossly negligently, but who are protected by broadly worded exculpation clauses, it will in future also be necessary to prove that the directors knew that they were acting negligently. 5

6 Key contacts Bernard Verbunt Amsterdam T E bernard.verbunt@simmons-simmons.com Regina Rath Frankfurt T E regina.rath@simmons-simmons.com Tom Fyfe Hong Kong T E tom.fyfe@simmons-simmons.com Paul Baker T E paul.baker@simmons-simmons.com Nicola Dyke T E nicola.dyke@simmons-simmons.com Stephen Gentle T E stephen.gentle@simmons-simmons.com Gerard Heyes T E gerard.heyes@simmons-simmons.com Richard Sims T E richard.sims@simmons-simmons.com Robert Turner T E robert.turner@simmons-simmons.com Francesco Maruffi Milan T E francesco.maruffi@simmons-simmons.com Joseph Morrissey T E morrissey@sewkis.com Jack Yoskowitz T E yoskowitz@sewkis.com David Mulle T E mulle@sewkis.com Eric Boillot T E eric.boillot@simmons-simmons.com Thierry Gontard T E thierry.gontard@simmons-simmons.com 6