Deceit Liability: Shortcomings in Fund's Investment Strategy

Nicola Sharp of Rahman Ravelli considers a case that underlines the importance of listing the full, specific nature of investments.

The High Court judgment in Old Park Capital Maestro Fund Limited v Old Park Capital Limited (in liquidation) & ors was noteworthy because the main issue of the claim in deceit turned on the description in the Offering Memorandum being ‘complete’. It is an issue that can be notable if the full nature of the investments has not been specifically listed.

This case involved a futures fund (that is now in liquidation) making various claims against its asset manager (OPC) and its officers, Hugo Van Kuffeler and Bruno Pannetier. The proceedings, issued in July 2021, were prompted by allegations that funds had been put into high-risk investments in a fraudulent breach of trust and fiduciary duty.

The high-risk investments were in unrated commercial papers of Kingsway Asset Management (KAM), a private company with no liquidity that failed to repay the investments, which caused the insolvency of the fund. In January 2023, the fund applied to amend its pleadings to introduce a claim in deceit against Mr Pannetier and Mr Van Kuffeler after the disclosure exercise revealed evidence of possible fraudulent misrepresentations.

In the end, not all of the claims were successful. The successful claims included OPC’s breach of contract and breach of its fiduciary duties arising from the investing of the fund’s money in the KAM commercial papers. All of the claims against Hugo Van Kuffeler failed and most of the other claims against Mr Pannetier failed.

But the fund’s claim in deceit against Mr Pannetier was successful. Mr Pannetier denied the claim, relying on his assertion that he believed the representations he made were true. This article looks at the reasons why the court concluded otherwise.

The representation

The relevant representation related to the investment approach of the fund. The Court found that the relevant passages in the Offering Memorandum had not “accurately and completely described the Fund’s investment objectives and the investment approach that the Fund would adopt.’’

Mr Van Kuffeler was the person who spoke about the representation at the board meeting. But Mr Pannetier also gave the representation by confirming to Mr Van Kuffeler that Mr Van Kuffeler could give the board the confirmation it sought, knowing that the fund would act on that confirmation.

Why was the representation determined to be false?

The Court concluded that Mr Van Kuffeler did not make the representation dishonestly as he had a genuine, if mistaken, belief that the Offering Memorandum said everything that needed to be said about the fund’s investment strategy and approach.

However, Mr Pannetier had significant expertise in investment banking and he had substantially settled the drafting of the fund’s investment objectives and investment approach in the Offering Memorandum. The Court concluded that he knew that the Offering Memorandum did not completely and accurately describe the investment approach that the fund would adopt.

The strategy involved a highly sophisticated plan to exploit discrepancies in the prices of highly liquid exchange-traded futures and money market instruments over a range of time zones (a strategy known as ‘Maestro’). The fund also had the power to invest in illiquid money market instruments, like the KAM commercial papers.

Why was it deemed to be dishonest?

The test of dishonesty is that set out in Derry v Peek (1889) 144 App. Cas. 337. The requisite “dishonesty” is present if Mr Pannetier made the representations either (i) knowing that they were false or (ii) recklessly, not caring whether they were true or not.

The problem was that Mr Pannetier knew what his target investors were interested in - and that did not include the KAM commercial papers. The Offering Memorandum did not mention KAM explicitly, which the Court inferred was more than a mere oversight on Bruno Pannetier’s part. Instead, it represented a conscious decision designed not to deter investors by mentioning a feature that he knew would be unattractive to them.

For that reason, the Court found that when Mr Pannetier gave the representations on the investment strategy - which included a statement that the Offering Memorandum contained a complete description of the investment approach that the fund would adopt in practice - Mr Pannetier knew that statement was untrue.

The fact that the fund had the power to invest in illiquid money market instruments generally was considered to be no answer to this falsity. The Offering Memorandum was not just setting out a list of investments that the fund could, in theory, acquire. Its function was also to inform investors of what would happen in practice.

For the description of the investment approach set out in the Offering Memorandum to be complete, it needed to refer to all material investments that it was contemplated the fund would actually make. That was particularly important given that the KAM commercial papers were of such a different character from the equity futures that would be bought and sold as part of the Maestro strategy.

In this case, the investors were not interested in investments that involved low liquidity or high-risk lending to unrated issuers. They wanted a futures strategy fund rather than, as one witness described it, a “credit fund”.

Analysis

The case can be viewed, therefore, as a clear sign of the need for full transparency in the financial sector. The outcome illustrates that it is possible for half truths to amount to deceit, which can then have obvious legal consequences.