The Tribune

• Bank failed to use 'necessary skill and diligence'

• Portfolio valuations 'laced with errors', says judge

• Awards total $1.4m after two verdicts this sum

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

A major Bahamian bank has been ordered to pay more than $1.1m to a former client for negligence and breach of contract over the management of its multi-million dollar investment portfolio.

Justice Ian Winder, in a September 7, 2020, ruling found that Ansbacher (Bahamas) "failed in its duty to exercise such skill, care and diligence as is usual or necessary" for an investment manager in handling assets belonging to Stonedene Ltd, a corporate client whose beneficial owners were not identified.

The Supreme Court ruling disclosed that valuations provided by Ansbacher (Bahamas) for Stonedene's investment holdings were "laced with errors", with a senior executive at the bank admitting it was relying on a "banking system" - rather than an investment management system - to produce these calculations.

And Justice Winder said it was "unacceptable in all the circumstances" for Ansbacher (Bahamas) to blame its 2011 sale to A. F. Holdings, the former Colina Financial Group, for its failure to preserve all documents and materials relating to its management of Stonedene's investment portfolio. He also queried whether due diligence related to the sale "flagged this potential claim" against the bank.

The Stonedene dispute erupted at the start of the 2008-2009 global financial crisis and subsequent recession, coinciding with the collapse of Wall Street investment bank, Lehman Brothers. It also occurred when Ansbacher (Bahamas) was still part of the worldwide group bearing the same name, and before its acquisition by A. F. Holdings.

A. F. Holdings and its principals, attorney Emanuel Alexiou and investment manager, Anthony Ferguson, thus inherited a dispute that has ultimately resulted in Ansbacher (Bahamas) having to pay substantial compensation twice to two former clients within a four-month time period.

This newspaper revealed in July how the Supreme Court, this time through Justice Indra Charles, ordered Ansbacher (Bahamas) to pay $317,000 in lost profits to a UK investor, Steven Chromik, over a bungled Netflix share trade he claims cost him his townhouse.

The Stonedene award takes the collective pay-out by Ansbacher (Bahamas) to its former clients to more than $1.4m. The former's relationship with the Bahamian bank began in October 17, 2016, via an investment management agreement for Ansbacher (Bahamas) to handle its assets.

This agreement was superseded when another entity, Artemis Asset Holding, opened an account with Ansbacher (Bahamas) in February 2008. Cash and investments transferred into the account later that year were beneficially owned by Stonedene, whose trustee was Appleby Trust (Cayman), the trust arm of the well-known international financial centre (IFC) law firm of the same name.

A fresh set of investment goals and guidelines (IGGs) were agreed for the Stonedene assets with its nominee, Artemis, seeking "aggressive long-term capital growth with a higher risk approach".

The target allocations were 70 percent of the assets invested in a diversified portfolio of established global equity stocks; 25 percent in fixed income securities, such as bonds; and 5 percent in alternative investments such as "lower risk" funds-of-funds structures.

However, Stonedene alleged that in September 2008 - at the global financial crisis' peak with Lehman Brothers' failure - that the value of its investment holdings plunged by 65.6 percent. It blamed the fall, from $5.051m to $1.739m, on Ansbacher (Bahamas) "acting outside the scope" of the IGG guidelines.

It claimed that this amounted to "breach of contract and/or negligent management" of its assets, and initiated legal proceedings before the Supreme Court. Stonedene, which was represented by attorneys Sean Moree and Vanessa Smith of McKinney, Bancroft & Hughes, hired Clarus Risk Ltd to review Ansbacher (Bahamas) performance as investment manager.

"In the report, Clarus Risk found that although part of the decline in value may have been due to capital outflows, the absolute figure for the loss attributable to the decline in value of the assets within the portfolio during this period was $1.849m, a loss of 39.96 percent," Stonedene alleged.

The $1.849m was the compensation it ultimately sought to claim at trial, rather than the full $3.3m fall in the value of its investments. Clarus Risk also constructed an asset portfolio that met the IGG terms, with the results and comparisons allegedly showing that Ansbacher (Bahamas) "under-performed the benchmark by $606,717" or 17.6 percent via investments that gave lower returns and were more volatile.

While Stonedene alleged that Ansbacher (Bahamas) acted as a "static" rather than active investment manager, and did not invest its holdings in accordance with the percentage guidelines set out in the IGG, the bank vehemently denied the allegations against it and said no loss had resulted from its actions or inactions.

The Bahamian financial institution argued that its management of the account "was in accordance with the industry standard", and that Stonedene failed to account for the fact that withdrawals from its account impacted the ability to meet the IGG allocation guidelines. It added that the financial crisis also impaired its ability to redeem various fund investments made on the client's behalf.

Both sides called their respective witnesses, with each providing an "expert" in financial services/investment management. Justice Winder noted that both experts agreed that Stonedene's investments were being managed outside the IGG limits, although a 5 percent variance either side was the equivalent of a "passive breach".

He found that much of the controversy between the two sides revolved around whether gold was considered as an alternative investment, as this impacted the asset allocation within the portfolio. Justice Winder cited a January 21, 2009, letter from Jillian Dames (then Dorsett), Ansbacher (Bahamas) ex-director and head of investment services, as admitting the IGG guidelines had been breached.

Equities at end-September 2008 were 56.85 percent of Stonedene's investment holdings, rather than the target 70 percent, while so-called "alternative investments" made-up 43.15 percent as opposed to the 25 percent goal.

Justice Winder said the evidence showed Ansbacher (Bahamas) was treating gold as an "alternative investment" and that the portfolio was being managed in breach of the asset allocation guidelines, dismissing the bank's arguments to the contrary.

He also found that the Bahamian bank breached its "duty of care" with respect to over-investing Stonedene's assets in the III Fund, which at one time represented 40 percent of the portfolio. That fund "indicated periods of extreme illiquidity and made it unreasonable for Ansbacher to have invested 25 percent of its alternative asset allocation in a single holding of the III Fund".

Stonedene alleged that it was not informed of III Fund's December 2008 suspension of redemption requests until January 2009, while Justice Winder said there was "no dispute" that the valuations of its investment holdings were "laced with errors".

Ms Dames said manual work was required to provide these because the "banking system" that Ansbacher (Bahamas) relied upon did not produce timely pricing and data feeds since it was not designed for investment management.

"I readily accept the submission of Stonedene that the production of timely and accurate valuations to the client is the duty of any investment manager, and this was not done in this case, resulting in a breach of duty," Justice Winder ruled.

"Ansbacher accepts that it has not preserved documentation relative to arrangements between itself and Stonedene. Ansbacher bemoans a change in ownership in 2011 which it says caused material to be misplaced. I did not accept Ansbacher's response as acceptable in all the circumstances..

"Ansbacher had been put on notice of this complaint since January 4, 2010, and threatening a claim. Whilst the sales agreement for the sale of Ansbacher may have been entered into in February 2009, the sale was not concluded then. One would have thought due diligence in the purchase would have flagged this potential claim."

Summing up, Justice Winder concluded: "I am satisfied that in all the circumstances, Ansbacher failed in its duty to exercise such skill, care and diligence as is usual or necessary in or for the ordinary or proper conduct of the profession of investment management.

"A reasonably competent and experienced investment manager would have provided accurate valuations, acted in accordance with the asset allocations in the IGGs, notified the client in the event the IGGs moved far outside the allocations, and preserved its documents in relation to the managed investments."

However, given that the saga occurred during the market volatility caused by the 2008 financial crisis, Justice Winder cut Stonedene's compensation by 40 percent from the $1.849m claimed, dropping it to $1.109m.