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SEC Charges UK-based Fund Management Group for Improper Preferential Client Treatment

The Securities and Exchange Commission (“SEC”) charged Martin Currie, Inc. (“MCI”) and Martin Currie Investment Management Ltd. (“MCIM”) with fraudulently using one of its U.S. fund clients to rescue another client.  MCI and MCIM are investment adviser firms headquartered in Scotland.  According to the SEC complaint, MCI and MCIM managed many accounts including the China Fund, Inc. (“China Fund”) and the Martin Currie China Hedge Fund L.P. (“Hedge Fund”) side by side under the direction of a single portfolio management team based in Shanghai, China.

According to the SEC, by November 2008 the Hedge Fund had invested $17 million in a Chinese printer cartridge recycling company (“Jackin.”)  As the global financial crisis deepened, the Hedge Fund and Jackin started to developed liquidity issues.  In April 2009, MCI and MCIM fraudulently caused the China Fund to make a $22.8 million convertible bond investment in a Jackin subsidiary, Ugent Holdings Ltd.  Ugent, in turn, used the proceeds to redeem $10 million of the Hedge Fund’s bonds and used the remaining $12.8 million to keep Jackin alive.

The SEC alleged that MCI and MCIM officials were aware that the China Fund’s involvement presented a direct conflict of interest and may have been unlawful.  MCI and MCIM advised the China Fund’s board to value the convertible bonds at cost while failing to disclose information that was relevant for the board to fairly value the bonds.

MCI and MCIM agreed to pay a total of nearly $14 million to the SEC and the United Kingdom’s Financial Services Authority (FSA.)