£12m claim hits Martin Currie fund

They faced huge losses when printer cartridge firm Ugent Holdings got into trading difficulties.

Edinburgh-based Martin Currie invested in Ugent on behalf of the US-based China Fund Inc, a mutual fund.

The Scottish firm and its insurers have now agreed to fully compensate investors in the fund for their original investment if Ugent fails to rise in value. Martin Currie will have to pay a 1m excess.

It has also admitted that there may have been a conflict of interest when it made the investment as it was putting other clients' money into Ugent's parent company.

As a result, the board of the China Fund, a New York listed mutual fund, has suspended further investments by Martin Currie into unlisted securities until China Fund is satisfied that all procedures are fully compliant with corporate governance guidelines.

Scotland on Sunday has learnt that if proper disclosure controls had been in place the China Fund may not have proceeded with its investment in a convertible bond issued by Ugent in April 2009.

Martin Currie has conducted a review of its compliance procedures and says it is satisfied there have been no similar cases. Unlisted equities are a small part of its business and assets in this area account for about 0.4 per cent of funds under management.

In a statement, the company said: "While the Ugent investment is currently valued by Martin Currie Inc (MCI) and China Fund Inc at zero, the company remains in business.

"MCI, in its role as direct investment manager, will continue to manage the investment in Ugent to realise its full potential. In the meantime, the cost of the initial investment is fully underwritten, thus ensuring that China Fund shareholders are protected on the downside while retaining full exposure to the original investment opportunity."

The firm has managed China Fund listed equities since 2001 and was appointed to handle the unlisted portfolio in 2007, the latter accounting for 7 per cent of the fund's net asset value as of October last year when the Ugent transaction came to light. In the past five years it has achieved a 28 per cent annualised return to shareholders in the China Fund.

Andy Sowerby, managing director in the sales and marketing division, admitted there had been a breakdown in the company's compliance on disclosure rules, specifically that it may not have fully informed the China Fund board it had client money invested in Ugent's parent company. "We made a mistake with our disclosures, but the fund will get their money back because of the indemnity. They will not lose out," he said.

In the agreement struck with insurers he disclosed the amount Martin Currie will have to write down is 1m. "There is some impact to our financial statement but not of a magnitude that will damage our capital position or ongoing profitability," he said.

James Lightburn, chairman of the China Fund, said in the fund's annual statement the board considers the compensation agreement "a satisfactory resolution of the issues".

In a statement to Scotland on Sunday, he said: "The China Fund Inc has enjoyed a successful relationship with Martin Currie dating back to 2001. Over the years, our shareholders have benefited from strong levels of performance from the portfolio.

"While we were extremely disappointed that this situation arose, we did appreciate Martin Currie's professionalism in quickly and, we feel, appropriately addressing it."