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By decisions of 21 October 2011, the Enforcement Committee ruled that two asset managementcompanies had failed to fulfil notably their obligations of due diligence and professionalism in controlling the risks of investments made for third parties, and therefore pronounced financial sanctions of amounts proportional to the gravity of these breaches and the size of each of the companies
- €300,000 against EIM France SAS (“EIM” hereafter)
- €150,000 against Alternative Leaders France (“ALF” hereafter).
These decisions followed the audits conducted by the AMF in the wake of the discovery of the fraud committed by Mr Bernard Madoff. These audits consisted in checking whether procedures were implemented by asset management companies, when selecting and monitoring the hedge funds they invest in, to identify the nature of the risks incurred and the risk levels that could be allowed.
First, it ruled that EIM and ALF had neglected their obligations of due diligence and professionalism in risk control
For the Enforcement Committee, these companies “did not possess the evidence that might have provided a sound basis for [investment] decisions that should have been made, not in the dark without access either to the premises or staff of [the company] Bernard L. Madoff Investment Securities or to the economic models employed, but in all clarity after conducting the due diligence that is essential to protect the interests of investors”.
Regarding this diligence, it was noted on the one hand that ALF did not “develop a formal fund monitoring procedure until the beginning of 2008” and on the other that in the course of that year, this diligence “fell far short of the legal and regulatory requirements and did not (…) enable it to justify the decisions to remain in [one of the funds] or to monitor the development of that investment with the necessary care”; regarding EIM, although the company had introduced a ‘Manager Selection Procedure (Alternative)” in2004, it was found that its analysts “were unable to gain access to the management company [of one of the funds] and settled for unverified indirect information, the source of which presented no guarantee of independence”, and that it had therefore failed “both to conduct the verifications required and to draw the necessary conclusions from the lack of transparency it had noted and the rumours of market manipulation and front running that had been brought to its attention”.
It was also found that ALF had not complied with all the conditions of its authorisation issued by the AMF, notably by failing to ensure that it had “(…) the human and technical resources required to carry out due diligence in the underlying fund selection, monitoring and control process (…)”, while EIM had ignored certain fund eligibility rules and regulatory ratios, notably by investing in two funds exposed to the strategy of Mr Bernard Madoff that did not meet the asset segregation requirement set out in Article411-34 of the AMF General Regulation.
Through these two decisions, the intention of the Enforcement Committee was to stress the importance itattaches to compliance with the prudent management rules applying to asset management companies making investments on behalf of third parties.
These decisions may be subject to appeal on the terms set out in Article R.621-44 of the Monetary andFinancial Code.
