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Henderson Settles with Hong Kong SFC

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HONG KONG (–Henderson Group will pay HK$400 million (US$51.5 million) to settle complaints from investors to the Hong Kong Securities and Futures Commission that its old Towry Law (Asia) division improperly sold hedge fund products to certain investors, failed to perform due diligence on the managers, failed to monitor the funds’ performance, and improperly recommended leverage.

Investors in the Circus Capital Protected Growth Fund Series 1 (PGF 1) and Circus Capital Protected Growth Fund Series 2 (PGF 2) will receive settlements potentially amounting to 80% of their original invested capital, according to the SFC. For investors still in the funds, the payment from Henderson will be whatever amount is needed to equal 80% of the investor’s original invested capital, when combined with whatever assets remain in the funds. In other words, if an investor originally placed US$1 million in the PGF 1 or 2, and that amount now stands at US$600,000, Henderson would pay $200,000. If the investor’s balance is $800,000 or more, Henderson would pay that investor nothing.

For investors who have already cashed out of the PGF 1 or 2 but received less than 80% of their original invested capital when they did so, Henderson will make up the difference. Investors who received 80% or more or their original capital when they cashed out won’t get anything from Henderson. Likewise, investors whose eventual return is projected to net them 80% or more of their original invested capital won’t get money from Henderson.

Investors who choose to remain in either PGF 1 or 2 until certain capital guarantees mature could get back more than 80% of their original capital, according to the SFC.

In announcing the settlement, SFC officials said Henderson had volunteered to make the payments, despite the fact it admitted no liability to investors.

The whole episode was prompted by investor complaints to the SFC that Towry Law (Asia), which Henderson closed to new business last year and which is now called UKFP (Asia) HK Ltd., did not perform proper due diligence, failed to consider whether the product was suitable for certain clients whose investment objectives and risk tolerance did not always match the product’s profile, failed to disclose certain relevant information to investors, and failed to monitor valuation and unit pricing.

Alan Linning, the SFC’s executive director of enforcement, said in a statement that the commission takes such mis-selling seriously and that it continues to be a problem. “It is vital that investment advisers assess risk profiles of investors and properly advise them about suitable products. It is a primary duty of advisers that the investment recommendations they make are reasonable. We will punish investment advisers who fail to have regard for the suitability of products for their customers.”

Another issue, also part of the settlement, regarded investors being improperly directed into leveraged funds, what the SFC referred to as “geared products.”

To settle complaints brought by investors in those products, Henderson agreed to pay money to ensure that investors get back at least 60% of their original invested capital, along the same terms as with the PGF 1 and 2 products, with one addition: For investors who paid money to satisfy a margin call due to the leverage, that margin money will be factored in to determining the 60% threshold. So an investor who originally placed $1 million in a geared product and who has $600,000 there now, but previously had to pay money to satisfy a margin call, will get that margin call money back. Investors with less than 60% of their capital remaining and who made a margin payment will get back whatever amount would bring them to the 60% threshold.

SFC officials said the lower threshold for the geared products reflected the fact that investors in these products weren’t necessarily mis-sold into the product, but were instead hurt by leverage recommendations. The geared products may have been entirely appropriate for a given investor’s risk profile, with the exception of whatever leverage was recommended.

“Geared investors may not have suffered any damage had they not acted upon the gearing advice and as such not all investors geared their investment. . . ,” according to the SFC release announcing the settlement. “The SFC has received relatively few complaints from ?? 1/2 investors in Geared Products, particularly considering the number of clients who invested in Geared Products.”

Eligible investors in both the PGF and geared products will receive letters from UKFP (Asia) HK Ltd. outlining the settlement scheme and asking them whether they wish to make a claim. PGF investors will get their letters in May and geared products investors will get theirs in June.

Despite the record-size settlement, SFC officials cautioned investors that the commission’s powers are limited, and that investors should choose their investments carefully.

“No investment is guaranteed, and the regulatory system is not designed to underwrite all investor losses,” SFC Chairman Martin Wheatley said in a statement. “Even in the event that proper advice has been given, investors must accept the risk of poor performance of a product due to unfavorable market movements or other adverse economic conditions. The SFC cannot order compensation and investors may have to turn to the civil courts for recourse.”

The SFC posted a question and answer paper on its web site to provide more information. It can be found here.

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Contact Bob Keane with questions or comments at [email protected].


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