THE COURT

1. The Court made USEFUL FINDINGS ON
   1. how SDMs should come to their findings, and
   2. What matters should be set out in their decisions.
2. The Court also helpfully provided IMPORTANT GUIDANCE on the roles and responsibilities of Boards of licensees when carrying out their functions as a Designated Manager and Fund Director.
3. The Court found that the Commission WAS JUSTIFIED in imposing a fine on Bordeaux, but remitted the issue of the amount to the SDM for reconsideration and/or clarification as to reasoning.
4. The prohibition orders against each of the directors under the following WERE ALSO UPHELD, although the length of the prohibition in respect of one of the directors was remitted for re-consideration and/or clarification as to reasoning.
   1. the Protection of Investors (Bailiwick of Guernsey) Law, 1987 (the POI Law) and
   2. the Regulation of Fiduciaries, Administration Businesses and
   3. Company Directors etc., (Bailiwick of Guernsey) Law, 2002 (the Fiduciaries Law)

THE APPEAL

1. Despite accepting that there were failings, the appellants considered
   1. that the individual prohibitions were unreasonable, and
   2. That the fine against the Bordeaux was excessive.
2. The appellants also alleged
   1. That the Commission had failed to demonstrate that their conduct had caused any loss to investors.
3. The Commission’s case was
   1. that it was not necessary to prove a causative loss, because its focus was on the directors’ fitness and propriety with regards to the Regulatory Laws, and
   2. Whether they had acted with prudence, sound judgment, integrity and skill when performing their functions as a Designated Manager.

FINDINGS

1. The Deputy Bailiff WAS NOT PERSUADED by the appellants’ Advocate
   1. that the SDM had misunderstood the nature of the relationship that Bordeaux (as administrator of the Fund) held with Arch Financial Products LLP (Arch FP) (the Investment Manager for the Fund).

CONFLICTS OF INTEREST

2. One of the core issues identified by the Commission was the way in which the appellants managed conflicts of interest that arose, especially
   1. Where two of the directors of Bordeaux also sat on the board of the Fund.
3. The SDM recognised
   1. “that investors and potential investors were aware that investments might be made in circumstances in which there was a conflict of interest”;
   2. however he went on to say:
   3. “there is no evidence that the Bordeaux Directors ever managed a conflict of interest and within the Fund structure,
   4. Bordeaux was the only independent entity in a position to fulfil the role” [Para 42, RC Decision]
4. The Deputy Bailiff observed that any failure to manage conflicts of interest that were acknowledged as being likely to exist is going to result in
   1. A finding of non-fulfilment of the minimum criteria for licensing (the MCL).
5. He went further to note that multiple failings are likely to be regarded as MAKING THE NON-FULFILMENT WORSE, and could not disagree with the SDM’s conclusion that there had been “serious failings” in relation to the failure to manage conflicts of interest.

FAILURES TO NOTIFY NAVS

1. Similarly, the Deputy Bailiff found that the late notifications of NAVs to the Channel Islands Stock Exchange were relevant to the Commission’s assessment of whether the MCL was fulfilled.
2. The RC Decision adopts the SDM’s statement that
   1. “the delays appear to be in part attributable in failures on the part of Bordeaux to organise its business with the appropriate degree of diligence and professionalism in breach of
      1. POI Schedule 4 para 1(1)(b) and para 2(1)(a) and (b) and the Fiduciaries Law Schedule 1 para 1(1)(a) and (b).” [‘ Para 44, RC Decision]
   2. It was recognised that these failings would not of themselves merit the making of prohibition orders, however they could be taken into account when considering all of the failings against the MCL.

OVERSIGHT BY THE ADMINISTRATOR

1. The SDM  had  concluded  that
   1. “Bordeaux was totally reliant on the Investment Manager to provide such [NAV] valuations”.
2. The appellants claimed that there was no evidence that the valuation method used by Arch FP was incorrect, and challenged the SDM’s finding that
   1. “Bordeaux should have taken steps to understand the methodology employed and put in place a procedure to check on the valuations produced by Arch FP”.[‘ Para 45, RC Decision]
3. Further findings of the SDM in respect of oversight failings are referred to in the RC Decision; for example
   1. the shipping notes, where the stance taken by the Bordeaux Directors “was completely unquestioning” and
   2. the undue reliance on Arch FP in respect of pricing information and a failure to question the rationale for significant variances in the value of the shares.
4. The Deputy Bailiff accepted that
   1. Bordeaux   was   permitted   by   its relationship with Arch FP to delegate, and
   2. That the Bordeaux directors were not expected to have any investment expertise.
5. However, the Court considered that on the facts the SDM was entitled to conclude that the absence of appropriate oversight had been demonstrated, and that
   1. “[T]HESE failures involves a failure to act with competence and soundness of judgment, with diligence and prudence and with appropriate professional skill:
      1. POI Schedule 4 para 1(1)(a), (b) and para 2(1)(a) and (b) and
      2. Fiduciaries Law Schedule 1 para 1(1)(a) and (b) and para 3(2)(a) and (b)”.[ Paras 46-47, RC Decision]
   2. The Deputy Bailiff concluded
      1. That it was the number of failings that gave rise to the overall impression that the Bordeaux directors WERE NOT to be regarded as fit and proper persons.
   3. The Deputy Bailiff REJECTED AN ARGUMENT that
      1. the SDM had disregarded the contractual position, and
      2. Held that the SDM was correctly referring to the non-fulfilment by the Bordeaux Directors of their statutory obligations.

COMPLIANCE WITH THE SCHEME PARTICULARS

1. The Court dismissed an argument that
   1. The appellants could not be criticised for failing to monitor whether investments complied with the scheme particulars unless there was evidence that investments were actually made outside the scheme documents.
2. In the Deputy Bailiff’s opinion the SDM’s finding (below) that refers directly to the requirements of the MCL.[ ‘ Para 48, RC Decision]
   1. “the failure to monitor whether investments complied with the Scheme Particulars manifested lack of a competence and soundness of judgment, diligence, prudence and appropriate skill”
3. The Court was also satisfied that the SDM was entitled to take into account instances of funds being released without sufficient scrutiny when assessing compliance with the MCL.
4. The Deputy Bailiff found that the SDM COULD NOT BE criticised for concluding that it was
   1. “Apparent that Bordeaux did not have adequate procedures in place relating to the making of payments.
   2. These functions were not adequately understood by staff resulting in a gap surrounding the review of payments contributing to a failure to ensure compliance with the Fund’s documentation and to protect the interests of investors.”[ Para 49, RC Decision]
5. In dealing with the Fund’s investment in ships and whether they were a sustainable opportunity (as required by the scheme particulars) the Court stressed that the issue
   1. was not whether or not the shipping investments were a sustainable opportunity,
   2. But whether or not the administrator had given sufficient thought to the question.
6. The Court was satisfied that the SDM was able to find that
   1. “[t]he requirements of the Scheme Particulars and investors’ best interests were not considered by Bordeaux.
   2. The impact of these failings were serious and greater scrutiny and due diligence on payments may have saved the investors from some of the losses they incurred.”[ Paras 50-51, RC Decision]

Part 2 of 3