Asset management: in the scandal that rocked GAM

Last April, Richard McNamara, chief financial officer of GAM Holding, spoke to about 50 people in a meeting room at the offices of investment firm King Street in St James's, London.

In his presentation on the strategy of the Swiss badet manager, Mr McNamara praised the funds of 11 billion francs, the absolute return funds, known as ARBF, whose glittering fees had been one of the strengths of a business often poor financial performance.

It was a validation moment for Tim Haywood, who was at the helm of the ARBF team and who had spent much of the previous year fighting internal complaints regarding his fund management. .

Barely three months later, on July 31, Mr. Haywood was suspended without public explanation. Investors panicked, withdrawing money from its funds, which have now been largely liquidated. GAM went further last month, announcing that Mr. Haywood had been fired for "serious misconduct". Haywood said he was becoming "a scapegoat" for the company's problems.

Since Mr. Haywood's suspension, the market value of GAM – about £ 2 billion a year ago – has dropped by two-thirds and General Manager Alexander Friedman has stepped down.

At the heart of the crisis is a conflict within the ARBF team over the nature of Haywood's relationship with an Australian financier and an Indian-born steel magnate, whose projects he has funded for hundreds of years. millions of dollars.

While one of Mr. Haywood's closest colleagues was filing a series of complaints about the star bond trader, the GAM was striving to both resolve a dispute that had changed. in crisis and explain its decisions to investors. For the rest of the industry, the company, which now makes money to ARBF investors, has become a lesson on the potential pitfalls of frantic pursuit of higher returns in an era of high interest rates. record interest.

"The damage has been enormous," says Amin Rajan, director of CREATE-Research. "They [the company] was not seen as being in control. Investors lost confidence in the company. "

Founded by an investor and art collector Gilbert de Botton (father of writer Alain) in 1983, GAM enjoys a reputation as a well-managed company that leaves a great deal of freedom to its main fund managers, allowing them to manage their money and generate income. ideas rather than compelling them to comply with them. his views of the house.

Its ARBF lineup had become one of its most important products, attracting profit-hungry investors disillusioned by the available yields of traditional government bonds. These funds could invest in a wide range of government, corporate and emerging market bonds, and use derivatives to try to make money in all market conditions.

Across the industry, fixed income fund managers are under pressure. As central banks reacted to the financial crisis by buying billions of dollars in bonds and lowering interest rates to unprecedented levels, investors were forced to look further for returns. They have often looked for less liquid badets that may offer higher returns, but be more difficult to quantify or sell during a downturn.

Mr. Haywood and the ARBF team have been particularly challenged to find sufficiently productive badets, whose reputation for success has allowed tens of millions of Swiss francs of new money from new clients and into funds all over the world. the weeks. However, in early 2017, the team was hit by the resignation of star trader Tom O'Shea, who managed about a third of the fund and was responsible for many of his winning deals.

"Since Tom left, none of you are making money," Haywood told his colleagues at a meeting.

Haywood and O'Shea declined to comment on this article. GAM also declined to comment.

The apparent solution to Mr. Haywood's predicament came from Sanjeev Gupta. After spending most of his life as a relatively obscure metals trader, this British entrepreneur of Indian origin has been transformed, through a series of daring contracts, into one of the United Kingdom's largest industrialists, leading an empire of steel and energy with an annual business turnover of more than $ 15 billion. .

Messrs. Gupta and Haywood were introduced by Australian financier Lex Greensill in early 2017 and immediately made their way. Mr Haywood told his acquaintances that he considered Mr Gupta as an innovative businessman who is trying to integrate energy production, mines and steel mills to improve the business. 39; efficiency. Mr. Gupta considered Mr. Haywood a cerebral financier.

Mr. Greensill declined to comment.

There appeared a working arrangement for all parties. Mr. Gupta needed funding for his seemingly endless projects. Mr. Haywood had a lot of capital, but he wanted higher returns. And Mr. Greensill provided the offers. Advisor to David Cameron when he was British Prime Minister, he had developed a business specializing in the niche of supply chain finance – a way to raise funds secured by payments paid by companies to their companies. suppliers.

While Mr. Haywood was better acquainted with the two men, he used Greensill's private plane several times for both business and leisure purposes. In 2017, Mr. Greensill invited Haywood to a performance of the Monteverdi Choir and Orchestras, sponsored by Greensill Capital, at Buckingham Palace.

Mr. Haywood's funds purchased bonds worth several hundred million pounds sterling to finance projects related to Mr. Gupta, as well as more bonds used to finance other projects organized by Mr. Greensill . One month prior to its suspension, Mr. Haywood's Luxembourg-registered fund held close to 12% of the total Greensill-related securities badets.

GAM was able to purchase some of this paper for substantial discounts up to face value, in recognition of its willingness to act quickly and the lack of liquidity of the bonds. In one case – bonds issued by a special vehicle called Laufer, which provided financing to Greensill's company – Mr. Haywood purchased the entire issue, an extremely unusual result. The transaction worked because the bonds paid the full amount expected.

Haywood also bought Greensill bonds to finance GFG's smelters and hydroelectric facilities in Lochaber, near Ben Nevis – an important Scottish government project – as well as container-backed bonds that convert used oil into oil. energy. GFG is a group of companies belonging to the Gupta family.

In June 2017, Mr. Haywood traveled to Glasgow on Greensill's plane for a dinner at the Cail Bruich restaurant with Scotland's Minister of Rural Economy, Fergus Ewing. At the dinner, which was also attended by MM. Gupta and Greensill, Mr. Ewing explained that the Scottish Government had a positive experience working with GFG.

For Haywood, these trips were part of the due diligence required, but the relationship he developed around Gupta-related investments began to cause concern in the office. His colleague Daniel Sheard was increasingly worried about Mr. Haywood's purchase of illiquid bonds and his proximity to MM. Greensill and Gupta.

For Mr. Sheard, a co-manager of ARBF funds, the risks of such exposure to a single issuer seemed too great. These bonds were extremely illiquid and seemed ill-suited to a fund that allowed investors to enter and exit daily.

By the end of summer 2017Mr. Sheard, who declined to comment on this article, reported his complaints at internal meetings, which led Mr. Friedman, Executive Director, to participate. In the fall, Haywood agreed to a plan, at Friedman's request, to reduce exposure to such illiquid bonds.

However, the dispute did not stop there. In November of the same year, Mr. Sheard had to travel to Australia to meet investors, but withdrew because he did not want to represent funds with so many Gupta bonds. Mr. Haywood went instead.

For Haywood, it was an opportunity to visit Mr. Gupta's new mining project in Whyalla, northwest of Adelaide. The two men also dined at Sydney's Catalina restaurant.

"GAM was one of many institutions that participated in the GFG Group's group financings and, like many of them, in exercising their fiduciary duties, they exercise due diligence through phone calls, meetings and site visits, "said a spokesman for GFG Alliance. "The problems between Mr. Haywood and GAM are entirely up to GAM."

Unsatisfied with the plan to reduce exposure to illiquid securities, Mr. Sheard decided to file a formal complaint against Mr. Hayman regarding Mr. Haywood's conduct. In the course of the investigation that followed, Mr. Haywood was asked to declare the complete list of all the gifts and invitations he had received and to write a letter justifying his actions. In GAM, the fact that Mr Haywood accepted a flight for him and his wife to the Mediterranean, at the invitation of Mr Greensill's driver, caused concern.

Since the 2010 Corruption Act, city businesses are on alert about the perception of hospitality. However, the problems are not always simple. Fund managers or badysts covering mining companies, for example, need access to remote mines in Africa or Australia. Often, the only way is to travel with the owner of the mine, which raises issues of conflict of interest. Many companies require staff to report such trips or obtain prior authorization, which Mr. Haywood has not been able to do.

By the end of 2017, Mr. Sheard was no longer working, say people familiar with the subject. Despite management's efforts to resolve the conflict, he remained concerned about the investments of the funds. He even sent a request for access to information at the end of 2017 to find out more about the projects in which the funds were investing and the relationship between Gupta's businesses and the Scottish government.

The internal investigation allowed Mr. Haywood to be notified of his conduct. However, Mr. Sheard felt that the investigation did not go far enough. In March 2018, while GAM issues were not yet known, he expressed his concerns by writing to the Financial Conduct Authority. The letter contained a list of allegations, according to people close to the case.

The FCA, which has itself been criticized for its alleged inability to protect whistleblowers or to prosecute, has interviewed those involved in the GAM. He has also browsed thousands of internal emails and phone records. FCA declined to comment.

Mr. Friedman, who also declined to comment on this article, faced a series of inter-related crises: he had to deal with the CFA's investigation of Mr. Sheard's complaint, while managing the impact of GAM's internal investigation of Mr. Haywood, what to do with Mr. Sheard and how to handle the large illiquid positions of the funds.

Within the company, a series of put options, purchased in the course of transactions by Mr. Haywood, was challenged, giving Mr. Greensill the right to sell additional millions of francs. of obligations to GAM, according to people familiar. with the material. The extent to which they were disclosed to GAM or could be incorporated into the company's order management system was also taken into account in the investigation of Mr. Haywood.

GAM announced last August that its own investigation had concluded that Mr. Haywood may have failed to exercise due diligence with respect to certain investments or to make the records available. He added, at the time, that he may have violated the company's policy that contracts must be signed by two people. He broke the rules for receiving gifts and entertainment and used his personal e-mail for business purposes, GAM said.

However, the company found "no material damage to the client" – indicating that investors in the funds had not suffered any losses as a result of Gupta-related transactions. He also stated that Mr. Haywood did not breach the fund rules in holding these investments and that there was no evidence of any resulting conflicts of interest. Several people familiar with the file say that several outside consultants searched Mr. Haywood's wallet but found no rule violations.

The fact that GAM did not sell Gupta's illiquid bonds before the crisis was released left the funds in a precarious situation. When Mr. Haywood's suspension was announced nine months ago, some investors ran to buy back their shares. But since the fund should sell the most liquid badets to meet these demands, illiquid bonds would become a much larger part of the remaining badets of investors. As a result, GAM then had to suspend the funds. The rush that followed for the exit led to the liquidation of the funds.

According to the company, the sale of the remaining 1.5 billion francs of bonds is expected in the coming months.

When he announced the dismissal of Mr. Haywood in February, the GAM gave little detail, except that "there was a serious failure to achieve the level of competence and prudence" expected . Persons familiar with this case stated that this was related to the manner in which Mr. Haywood exercised due diligence with respect to the obligations and the manner in which he had maintained business records.

Gupta's links themselves, however, were not a secret; they were featured in the semi-annual report of the funds for the end of 2017. "They were hiding in plain sight," said one investor.

Other reports by Ralph Atkins, Chris Flood and Arash Mbadoudi in London