Select Committee on Treasury Minutes of Evidence

Memorandum submitted by Class Law


  It is hard to estimate the financial scale, as we are able only to look at the cases of those clients who have instructed us. However, our clients' losses to date are substantially in excess of £70 million with individual losses ranging from millions of pounds down to £6,000/£7,000. Bearing in mind that we still only represent a relatively small number of investors out of a total number that we believe could reach 50,000, the losses could be vast.


  The vast majority of claims are concentrated on those Split Capital Trusts that have three main features:

    (a)  high levels of debt;

    (b)  cross-holdings in other Split Capital Trusts;

    (c)  high level of management charges and fees.

  We have only investigated those funds or advisors about whom we have received complaints and thus our work has been defendant specific.


  There are two distinct groups that invested in Split Capital Trusts:

    (a)  those that purchased through an advisor; or

    (b)  those who purchased on an execution only basis.

  The advisory clients have two parts, those that received advice only and those who entrusted their money to a discretionary fund manager.

  The common area of negligence amongst advisors in my view, is that they failed to understand the structural differences between those Split Capital Trusts that were sound and or of relatively low risk and those Split Capital Trusts that were highly"geared and with cross-holdings in other Split Capital Trusts, that were clearly of much higher risk. In many cases, it is quite clear that the advisors merely relied upon a leaflet or marketing documents from the fund managers rather than reading the prospectus, which would in most cases have shown the risks, involved. It is also clear that many IFAs simply did not understand Split Capital Trusts at all, particularly those from a life insurance background who had become general IFAs.

  One particular aspect of great concern is the role of Brewin Dolphin. We have more complaints about that broking firm than any other advisor. Brewin Dolphin were brokers and advisors to many of the funds and Mr D Thomas of Brewin Dolphin was the person who produced most of the research on the Split Capital Trusts. In addition, Brewin Dolphin managed discretionary funds of many of our clients and invested this discretionary money directly into companies for whom they were acting. An even more extreme example is BFS where clients gave monies to BFS Investments plc to manage on a discretionary basis and those finds were invested directly into BFS's various funds.


  Research still continues into each and every prospectus, however, what is becoming clear is that the marketing material did not always reflect the risk warnings that were contained in the prospectus, nor did brokers notes, which were issued at the time of the prospectus, reflect the true position. There is an important issue as to whether these highly sophisticated financial instruments with high levels of risk should have been marketed to the public at all. In November 1997 Piers Currie, a director of Aberdeen Asset Management was quoted in the Financial Times as saying "You either have to really know what you are doing and have access to up to date, detailed information or have a financial advisor." We agree with this statement but ask the question as to why Aberdeen felt that these products were suitable to be marketed to the Public.


  I have produced a chart showing many of the cross relationships concerned with the matters before the Committee. As will be seen, there are numerous cross-relationships between directors who sat on each other's boards and then invested in each other's funds. It seems to me that there are significant conflicts of interest and it will be interesting in the fullness of time to discover whether those directors with conflicts participated in, or made investment decisions.


  There have been different types of mis-selling or misrepresentation, some of which has been by way of sins of omission in not mentioning the true effect of a collapse of the market upon these particular Split Capital Trusts. The most common mis-selling related to the way in which the products were marketed and I produce some examples of literature. As will be seen the literature always reflects the low risk but does not explain the effect of the collapse of the market. I produce a letter from the Chairman of Leverage Income to a client written in March 2002, which is clear evidence that the Directors were aware of the likely result.

  The Bloomberg supplements were widely read and as can be seen used the expression "as safe as houses." It is interesting to note that these supplements were sponsored by Aberdeen, BFS etc and most of the articles were written by representatives of those involved in managing or selling the Funds and these supplements must be viewed as significant marketing material.

  Finally, there may be important evidence to give to the Committee on the knowledge of the FSA long before the crisis emerged. Unfortunately, the documents may not arrive with me until the day before the hearing but if they are received, they will be made available to the Committee.

18 October 2002

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