BOV property fund: questions asked about massive withdrawal of 14 million shares

A massive withdrawal of 14 million shares from the Multi-Manager Property Fund – run by Bank of Valletta and its subsidiaries Valletta Fund Services and Valletta Fund Management – is believed to have taken place some time between March and September 2008, when the fund was losing €50 million.

VFM invested some €17 million investment in the Belgravia European Property Fund which lost in excess of 90% and is today estimated at €1.3m, while other investments originally valued at some €47 million have fallen to €18.5 million.

Finco Treasury Management has accused BOV, the custodian of the fund and parent company of VFM, of not being transparent with shareholders when it failed to disclose that the Belgravia fund’s directors were being criminally investigated for fraud by the Jersey police, and that its shares had been suspended by the Jersey Financial Services Commission.

Now the firm is adding that BOV had not informed investors of an application on 17 March, 2008, to redeem part of the investment in the Belgravia European Property Fund, which was not accepted because the fund had been suspended from the next dealing date.

Instead investors were only advised that redemptions in the fund had been suspended on 7 August, 2008, and until that date investors kept depositing money in the fund “without any knowledge of the suspension.”

Finco is claiming that the massive withdrawal of shares – amounting to some 16% of the €84 million fund – could not have been related to the global credit crisis. “By the 7 August, the 2008 global credit crisis had not yet entered the meltdown phase and had not yet caused general and global public panic, which meltdown effectively commenced only with Lehman filing for bankruptcy on 15 September 2008,” the firm said.

Finco said it had “repeatedly” requested VFM for information as to the exact months in which this “abnormal level of redemptions” took place.

But VFM invoked client confidentiality and refused the information. Finco said it had only asked for the number, value and date of related party transactions “to gauge whether its suspicions of impropriety have any foundation or otherwise and whether they merit further investigation.”

Finco is saying as long as this information is not provided, the abnormal activity that occurred during the period when the general body of investors were not yet privy to the fact that dealing in the Belgravia European Property Fund was suspended, “remains questionable.”

Finco said it not alleging any improper behaviour but since the substantial took place during the year ending 30 September 2008, Finco is demanding “all necessary information to put the minds of claimants and all other investors at rest that there were no investors who may have benefited unfairly from the information available to the SICAV and to VFM with regard to the suspension of redemptions in the Belgravia funds before this information was made available in the public domain by redeeming their investments in the Fund to the detriment of the remaining body of investors.”

The Malta Financial Services Authority may have also overlooked the relationship between Bank of Valletta and the subsidiaries that managed the Multi-Manager Property Fund, allegedly in breach of investment services rules.

Finco Treasury Management is claiming these rules required the total independence of each of the functionaries of the property fund. Bank of Valletta has a majority control in Valletta Fund Management and Valletta Fund Services, and Finco is claiming that the fund managers ignored the property funds’ own rules.

Finco said the respondents “seriously failed to exercise the diligence required of them in the selection of investments for the Fund.”

It said that while BOV had no information available to rely on when it committed €24 million – over 41% of the entire fund assets – into Belgravia’s funds, Valletta Fund Management should have requested Belgravia’s signed interim accounts.

BOV is claiming that since the decision to invest in Belgravia funds occurred around February 2006 up to October 2007 “the only relevant information for such decision was that existing and available at the time and that which both VFM and Insight could rely on.”

BOV had also claimed that VM had “no clear obligations arising out of law” to communicate any relevant information in relation to the Fund investments to investors.

“The respondents seem to imply that they do not owe obligations to investors in the Fund, including fiduciary obligations with a clear duty to act in the most honest, transparent, impartial manner and with the diligence of a bonus paterfamilias and with the utmost good faith,” Finco said.

Finco said that while VFM had sent letters to investors and organised various meetings, the information provided was of a formal nature “that excluded altogether the underlying substantive negative developments” within the Belgravia fund.

This included the fact that Belgravia suspended redemption requests of the fund in March 2008; that both a criminal and regulatory investigation into Belgravia was ongoing; and that the Jersey Financial Services Commission had suspended the Belgravia Funds because they were without accounting controls and the true value could not be reliably ascertained.

“A typical example of VFM’s selective reporting is the report that the Belgravia funds had new directors without reference to the fact that the previous directors had been removed by Barclays Trustees and by the Jersey Financial Services Commission, that some of the said directors had been arrested and that others still had evaded arrest by fleeing to the Middle East,” Finco said.