If you want an investment professional to understand the niceties of operational risk there can be no better training opportunity than to send them to attend a meeting of creditors and investors convened by the liquidator of an offshore fund that has gone wrong.
I attended such a meeting last Thursday. There were a number of things that struck me about it.
Firstly only a handful of investors attended the meeting – some joined the meeting by phone but very few had made arrangements to attend or be represented at the meeting. Was it concerns over publicity, costs – throwing good money after bad, an assessment of the hopelessness of the situation? It is difficult to say.
Meetings of this nature are designed to impart information to those affected by the events in the Fund – and there are significant costs attached to doing so. These costs are inevitable and inevitably they eat into the pot available for recovery. Is there a case to insist on some mechanism such as insurance to cover such eventualities on investments in future?
The nature of the classifications into investor and creditor claims and the priorities given to each type of claim throw into sharp relief what remedies are available to those who stand to lose money from the collapse of such a fund. Who recovers what ahead of whom, where there are funds to distribute to such claimants, can then become significant issues – the difference between getting some recovery or none at all. It also highlights what a fine balance there can sometimes be between a fund being classified as solvent or insolvent based on how a claim may be classified.
Despite the wonderful clarity of vision 20/20 hindsight brings with it – and whether or not there were tell tale signs before the allegations of potential negligence and wrong doing arose – what is instructive about such a meeting is for investment professionals to consider ahead of an investment the sort of things that they may need to deal with in the event an investment of theirs goes wrong…….
- What avenues are available to them to recover their investment if things went wrong
- Do they really understand how their assets will be held and how they can be dealt with
- The nature of claims that could arise and the priority in which they would be paid
- The expenses involved in recovering what is left of an investment and who should bear them or whether it is worth paying for insurance to cover such eventualities
- What justifications would there be for the investment if the disclosed risks actually came to pass
- Can service providers to a fund be properly held to account for their actions or inactions in relation to the fund and to what extent is it reasonable to rely on them in making such an investment.
Where there is fraud – no amount of prior work may necessarily unearth the issues and however good ones risk management – controls can always be overridden. But what is important from a training perspective is to bring home the reality that these things do happen and the only way to emphasise to investment professionals the complications in unravelling such matters is in my view by making them attend these types of meetings – so that they understand first hand what happens when a fund ‘blows up’ and that it is not simply a theoretical risk.
©Jaitly LLP