LONDON - U.K. pension executives are calling Jardine Fleming Asset Management officials on the carpet to explain trading practices involving the firm's affiliated brokerage unit, Fledgling Securities Ltd.
Failure to disclose commissions earned from trading through the internal broker has unsettled pension executives who already are upset over revelations that Colin Armstrong, Jardine Fleming's former chief investment officer, allocated better-performing trades to his personal account and a favored hedge fund at the expense of three Jardine Fleming pooled vehicles.
Hong Kong-based Jardine Fleming Asset Management has lost its registration with the U.K.'s Investment Management Regulatory Organisation because of the trading practices, lack of controls and violations of IMRO rules. U.K. pension trustees now must decide whether to shift their accounts to another Jardine Fleming unit, to Fleming Investment Management or to another firm completely.
Jardine Fleming is a joint venture between London-based Robert Fleming Group and Hong Kong-based Jardine Matheson.
Failure by officials of Jardine Fleming and other Fleming units to police trading practices and maintain adequate controls has cost Fleming Group (British pounds) 700,000 ($1.085 million) in fines to IMRO plus compensation of HK$149 million ($19.3 million) to clients of the affected pooled funds.
U.S. pension clients of Rowe Price-Fleming International, a joint venture between T. Rowe Price Associates and Fleming Group, were not affected by Jardine Fleming's recent travails, because their portfolios are managed and traded separately.
Jardine Fleming manages some (British pounds)800 million ($1.24 billion) for 10 U.K. pension clients including some of the biggest and most sophisticated pension funds in Britain. Corporate clients include the pension funds of IBM United Kingdom Ltd.; Imperial Tobacco, a unit of Hansons PLC; Vauxhall Motors Ltd.; General Electric Co. PLC; Bass PLC; and Rolls-Royce PLC. Other pension clients include the Post Office Superannuation Scheme and the pension funds for the Civil Aviation Authority, Avon County and Strathclyde Pension Fund.
Already, one leading consultant, who asked not to be identified, has urged clients to drop Jardine Fleming for Pacific Basin accounts because of lack of confidence in the manager's personnel, although the consultant still likes the firm's Tokyo operation.
Rodney Williams, a spokesman for Jardine Fleming, declined to comment on the issue, saying it was a private matter between the manager and its clients.
The failure to disclose commissions earned by Fledgling Securities might be the last straw for some Jardine Fleming clients.
An investigation recently conducted by Price Waterhouse's Hong Kong office revealed the manager had not disclosed that trades had gone through the Fledgling Securities, instead attributing trades to outside brokers. The accounting firm also identified half a dozen ways in which the use of Fledgling Securities created a potential conflict of interests.
Neither Price Waterhouse nor IMRO uncovered any losses to clients, but the lack of disclosure nevertheless is troubling to clients - some of whom plan to quiz the manager as to whether they were overcharged on commissions and whether such practices encouraged excessive turnover.
"It's a conflict of interest, particularly if it's not disclosed," said one U.K. pension executive, who requested anonymity.
According to an IMRO press release, Fledgling Securities retained undisclosed commissions totaling more than HK$26,329,494 (British pounds 2.2 million) from trades handled for Jardine Fleming clients between 1993 and 1995. In addition, the broker retained HK$71,172,427 (British pounds 5.9 million) in undisclosed commissions from other Fleming Group clients, including continental European pension funds.
An IMRO press release said the failure to disclose the commissions violated its rules requiring disclosure of trade-related compensation earned by the firm and related entities. "Although total commissions charged were disclosed to JFAM's customers, JFAM did not disclose that some of those commissions were retained by an associated broker," the IMRO release said.
In a letter to clients, Jardine Fleming officials explained: "The basis of charges brought against us by IMRO was that we should have disclosed not just the amount of commissions charged, but also the fact that the transactions were transacted through FSL and the commissions it retained.
"Instead, while the total commissions charged were disclosed, the fact that FSL had retained part of the commissions was not disclosed. Trade confirmations recorded all of the commissions as having been earned by the local market broker rather than by FSL."
What's more, in a letter sent to clients following its investigation, outside auditor Price Waterhouse identified a variety of ways in which inadequate disclosure created potential conflict of interests.
Price Waterhouse said Jardine Fleming should have provided disclosure on the following trading practices:
Bulk discounts. The report said Jardine Fleming should disclose whether it paid a lower commission rate based on size than would have been available to individual clients.
For example, if the manager bought or sold (British pounds)1 million in stock a day for 10 clients, Jardine Fleming failed to reflect whether the commissions charged each client reflected the lower bulk discount price obtained from transacting (British pounds)10 million in securities trades, or whether each client was billed at the higher rate as if their trades had been processed individually.
Crosses between clients. Purchases and sales crossed between Jardine Fleming clients were charged at half of the normal level but such charges were not disclosed.
Markups on Eurobonds and Eurowarrants. The report said separate charges were not disclosed on the contract.
Sales tax. In a small number of Asian markets, charges for sales taxes were avoided by transacting trades outside of the domestic market, but it was not made clear if clients avoided the charges. One client, however, said he knew of an instance where another client had been refunded a sales tax that had been charged in error.
Purchases of American and global depository receipts. These securities were purchased from market makers, but it was not clear that a 0.5% commission went to Fledgling Securities.
Broker discounts. Jardine Fleming benefited from low interbroker rates but commissions charged clients were at comparable institutional rates, the report said. It was not clear if such savings were passed on to clients.
In no case, however, is there any evidence that Jardine Fleming overcharged clients. The problem, clients said, is that there's no way to tell for sure based on the information provided to them.
"As far as we can see, it's purely (a) disclosure (issue) but these are some of the issues we have to look at," said one U.K. pension executive, who asked not to be named. The key issue, he said, is whether pension funds obtained best execution for trades that went through Fledgling Securities.
The pension executive was aware that trades were going through the affiliated broker. While not particularly happy about using a related broker, he acknowledged the advantage to clients is that FSL assumes counterparty risk and provides confidentiality to clients.
Another pension executive said the situation at Jardine Fleming would not arise in a market that had fees that are not augmented by hidden charges.
Trading issues aside, U.K. pension executives now must decide if they want to retain a Fleming-related manager, given the rescission of IMRO authority for Jardine Fleming Asset Management. Trustees have a choice of switching to London-based Fleming Investment Management, Hong Kong-based Jardine Fleming Investment Management, which is regulated by Hong Kong's Securities & Futures Commission, or finding another manager.
Officials at the (British pounds)12 billion Post Office Superannuation Scheme, London, have acknowledged Jardine Fleming's (British pounds)360 million Pacific Basin portfolio will be examined as part of a normal three-year review. The (British pounds)1.1 billion Avon Pension Fund, Bristol, will review the (British pounds)40 million Japanese equity portfolio run by Jardine Fleming later this month, said Tony Worth, investment manager.
One major issue is whether pension executives retain confidence in Jardine Fleming's team, which now is expected to enjoy less autonomy. Pension executives must determine if that's what they had hired.
Part of the problem, explained another pension executive, is that one doesn't learn that much about another manager's staff from a sales presentation. What's more, the next manager hired also could face a scandal, he said.
The debacle is viewed as bad news for money managers in less regulated markets, although Hong Kong has been striving to bolster regulation in advance of China's takeover of the British colony next year.
"I think (pension executives) might want to think hard as to whether they want to use a manager based in Hong Kong," said Robert Ross, director of consulting for Frank Russell Co., London.
"It's a bit of a blow for the Hong Kong fund management industry," said Greg Cooper, director, actuarial and asset consulting department at Towers Perrin Forster & Crosby, Hong Kong. Other managers "fear being tarred with the same brush" or exposure of a similar problem, he said.
Robert Fleming Group already had shifted a big investment trust back to London before the IMRO investigation started. "There's very definitely a danger (of institutional investors) moving some of their funds back to London," said Shane Norman, managing director of RCP & Partners (Asia) Ltd., Hong Kong, a rating service for money managers.
Francine Brevetti contributed to this article.