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Arch hit with £150m legal claim over Cru funds
by Jun Merrett on Jan 16, 2012 at 07:51
The board of the cell companies that make up the Arch Cru funds is suing Arch Financial Products for £150 million for alleged gross negligence in its role as investment manager.
The board has accused Arch of acting negligently, making secret profits without accounting for them, and performing a number of investments despite conflicts of interest.
In a High Court writ issued against Arch, the board has listed a series of breaches of duty it alleges Arch committed in the course of managing the investment portfolio of each cell between July 2007 and November 2009, when it was replaced as manager.
Arch has said it will fight the claims, claiming they are 'highly subjective and equally, highly speculative'.
The largest single investment highlighted by the writ is the $167 million placed in shipping assets, which resulted in losses of $162 million. That money was lent to companies controlled by Nicolas Koros and members of his family to convert a fleet of seven ships. The board has accused Arch of ignoring warnings from its own lawyers that Salamis Shipyards, one of Koros' companies tasked with converting the ships, was in poor financial condition and was facing a bankruptcy petition. It added the seven ships were of poor quality and that Koros had previoualy been involved in three major shipping ventures that had failed, leaving investors with large losses.
It said Arch ‘knew or should have known if it had properly considered the merits of the investments that it was exceptionally risky and were in all circumstances uneconomic and inappropriate investments'.
The board accused Arch of relying on a ‘grossly inflated’ net asset value of the ships based on models and assumptions of their value once converted and in a continued high shipping market. ‘Arch acknowledged in a written proposal to its investment committee in 2007 that market values of the ships could rapidly fall, but failed to have proper regard to that fact,' it said.
The writ also lists a series of alleged 'secret profits' made by Arch in connection with the shipping investments, which amounted to £1.7 million and led to a conflict of interest, according to the board.
The board has alleged that Arch received further 'secret profits' and payments unauthorised by the cells connected to its investments in student accomodation company Lonscale, property firm Nice Group and investment management group Noble. The largest of these, linked to the cells' investment in Lonscale, amounted to £3 million.
The writ has also highlighted alleged conflicts of interest arising from the cells' investments in Cru Investment Management, first revealed by New Model Adviser®, and in Arch itself.
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