THE Financial Services Authority, the principal City of London watchdog, has written to MPs confirming that criminal prosecutions could follow its investigation into the split capital investment trust scandal.
The regulator’s note to members of the Treasury Select Committee — which on Tuesday will haul in three of the firms involved in the debacle for a grilling — also spells out that individuals could be banned from working in the City for life if there is any evidence of wrongdoing.
Aberdeen Asset Management (AAM) and stockbrokers Brewin Dolphin — which trades as Bell Lawrie White in Scotland — and brokers Collins Stewart will face a bloodcurdling onslaught of questions from furious MPs, many of whose constituents have lost their life savings in collapsed split capital trusts, 19 of which have now suspended their shares.
Split trusts are listed investment vehicles with two or more classes of shares, and many promised high income or safe capital returns at set dates. But a total of around 50,000 small investors have lost hundreds of millions of pounds in them.
The three businesses are among those alleged to have played a role in a “magic circle” of fund managers and brokers who allegedly colluded to prop up share prices in each other’s trusts through a web of cross-shareholdings. Goals included boosting fund management fees and sustaining the income portfolios within their trusts.
MPs also want straight answers from brokers who earned handsome fees from the initial public offerings (IPOs) of the trusts, then went on to sell large tranches of the shares.
Some of those who have lost money were persuaded to invest their life savings in a single trust, led to believe these were low-risk holdings.
MPs will also grill brokers over suggestions that “widows and orphans” were duped into high-risk funds, some of which were 100% geared, on the basis that these were a safe haven for their cash.
Aberdeen confirmed on Friday that the former chief executive of its asset management arm, Chris Fishwick, will attend the hearing and face a barrage of questions. Sometimes referred to as the “master magician”, Fishwick was criticised for ducking out of a previous hearing of the committee. He left Aberdeen Asset Management earlier this month.
MPs will have two main lines of questioning. First, they want to get to the bottom not only of what took place, but whether there are broader issues of corruption in the City of London.
They also want answers about precisely how the trusts were structured and who were their true architects. Then they want to know who was working with whom, how the trusts were marketed and who was investing in what.
At the heart of their questioning will be the issue of collusion. Did anyone involved in either managing or marketing the trusts collude in a way that impacted on share prices and could be construed as market abuse?
The other line of questioning will concern what compensation might be offered to those who lost money when the 19 trusts collapsed.
Aberdeen Asset Management is expected to come under renewed fire over its earlier offer of limited compensation for investors in its Progressive Growth unit trust, which invested predominantly in splits.
Aberdeen Asset Management said it is still working hard to progress a plan to give what it calls ‘uplift’ to Progressive Growth investors, but that there were a number of obstacles to be overcome. This however, would provide nothing for the victims of the collapsed trusts, which are not strictly regulated by the FSA.
Piers Currie, Aberdeen Asset Management’s marketing director, said he regretted the way the issue of the split caps was overshadowing the good news story about many of the other trusts in the Aberdeen stable. “The whole thing is becoming very surreal,” he said.
MPs last week questioned the FSA, which is chaired by the Sir Howard Davies, about a warning that the Guernsey Financial Services Commission is said to have given the regulator in early 2001. However, the commission later said it had given no official warning about systemic risk.
This article, bylined Ian Fraser and Theresa Hunter, was published in the Sunday Herald on 27 October 2002