Bank of Valletta fined €350,000 in first property fund investigation

Updated at 6:23pm with BOV statement

Bank of Valletta has been fined an administrative penalty of some €350,000 for breach of investment services rules over the administration of the La Valette multi-manager property fund, which lost €50 million in value. The bank said it will be appealing the decision.

The Malta Financial Services Authority today announced an administrative penalty of €149,821 on Valletta Fund Management – BOV’s investment arm – as managers of the fund over its “failure to act with the level of care and diligence required of licence holders with regards to the conduct of their business.”

VFM was found to have wrongly applied its own investment restriction which prohibited the fund from investing in other real estate funds whose debts were leveraged at more than 100% of net assets: meaning, having too much debt to survive a downturn in value.

Specifically, it was a €17 million investment in the Belgravia European Property Fund - that was geared at over 100% - that is suspected of having lost in excess of 90% and is today estimated at €1.3m, while other investments originally valued at some €47 million fell to €18.5 million.

The regulator also said VFM did not “properly monitor its delegates” – Valletta Fund Services and Insight Investment Management – on applying the restrictions, and failing to maintain adequate records.

No mention was made of the fact that the property fund was being managed by two subsidiaries, VFM and VFS, of the actual custodian of the fund, Bank of Valletta.

BOV was itself fined €197,995 for the wrong application of the investment restriction, and for not making accurate reporting in the property fund’s annual financial reports for the years 2006-2009.

In a statement following the MFSA notice, BOV reiterated that its views of the gearing restriction were different from that of the regulator.“The determination received today, though disappointing, is not wholly unexpected,” the bank said. “BOV and VFM remain firmly of the view that the conclusions of the MFSA are wrong in fact and at law, and will be filing an appeal on the MFSA decisions.”

It added that the impact of this differing view on the investment restriction has already been fully taken into account in its compensatory share offer price of €0.75 per share, which comprises 24c in compensation. The amount was reached by basing the fund’s performance against two independent external low geared fund reference points.

“In any event, BOV and VFM maintain that, even if the view of the MFSA were to be upheld, the offer made by BOV fully compensates the investor for any loss incurred as a result of any incorrect application of the investment restriction, which is denied.”

The MFSA is still in the process of investigating two major complaints: one of misselling the property fund to clients who were not experienced investors as defined by the law; and allegations of access to price-sensitive information.

Bank of Valletta has rejected suggestions that bank employees and a property fund director had access to price-sensitive information on the La Valette multi-manager property fund before it was suspended by the bank. 

Allegations raised in judicial protests by the fund’s investors and Finco Treasury Management claim that €13.4 million in shares, or 16% of the fund, was withdrawn by investors aware of the worsening state of the property fund.

BOV has announced a compensatory 75c share offer to some 1,000 investors in the fund. But Paul Bonello, the stockbroker who kick-started the series of judicial protests against the bank, has called the offer “morally dishonest”.

Bonello said the 75c offer was positive as a first step, but that the bank was presenting the property fund investors with a “take it or leave it offer.”