Capita has come under further pressure over its role in the Arch Cru scandal after ex-directors of the cell companies that make up the funds alleged it was responsible for flaws in the structure of the investments.
The ex-directors of the Channel Islands-listed cells have claimed Capita was responsible for the losses incurred by the £400 million funds, which dropped in value by around 40% following their suspension due to illiquidity.
They said the structure employed by the Arch Cru funds, of Oeics investing in the cells which in turn were invested in illiquid assets, such as private finance and private equity, was flawed.
Neal Meader, Peter Radford and Bordeaux Services, directors of the cells until December 2009, have made the allegations in their defence against claims totalling £160 million from the current directors, who have alleged they failed to understand, monitor and oversee investments.
The defence reads: ‘The losses or extent of the losses were caused by the unforeseeable actions of Capita in investing in the funds on behalf of investors in UK Oeics who required liquidity, which the funds were expressly not designed to provide (which led to investments having to be realised at a loss in order to meet their need for liquidity).’
Lawyers for the directors added they were not aware of the extent to which money flowing into the cells was coming from the Arch Cru funds, and that it was not their role to ‘second-guess’ Capita’s judgment on the suitability of the investments.
Capita has hit back, arguing that claim was ‘not credible’ and adding that the decision to invest into the cells was taken by Arch Financial Products. ‘It is now apparent it was always Arch’s strategy for the Oeics to be primarily invested in the Guernsey cells in this way, and that Arch were closely involved in the establishment of the Guernsey cells for this purpose,’ said a Capita spokeswoman.
The news follows Capita’s upbraiding by the Financial Services Authority last month over its failures as authorised corporate director for the funds. The regulator said Capita failed to monitor former fund manager Arch and the liquidity risks affecting the funds, and failed to ensure the funds were properly priced. But the regulator held back from imposing a £4 million fine, pointing to the costs Capita had already incurred due to Cru.
Last week the Treasury held talks with the Guernsey government over a potential further payout for Arch Cru investors in addition to the £54 million redress scheme funded by Capita and depositories HSBC and BNY Mellon, and the planned £110 million compensation funded by advisers found to have mis-sold the funds.