Real Estate Opportunities (REO), the property fund controlled by Dublin-headquartered property group Treasury Holdings, is suing its former fund manager Aberdeen Asset Management for losses sustained in the split-capital investment trust crisis earlier this decade.
Aberdeen, the firm behind a number of property funds including the fund of core funds Aberdeen Indirect Property Partners, and broker UBS are being sued for up to £80 million as compensation for losses from REO's income portfolio.
The threat of legal action has been in the air for some time, ever since REO announced that it was considering filing a lawsuit against Aberdeen when it fired the UK firm as its manager in 2003. Aberdeen was hired as fund manager and advisor when REO moved into the split capital investment trust market in June 2001, and invested its assets in a combination of bonds and property.
However, split capital trusts, which “split” the dividends and capital appreciation of an investment allowing different investors to take on different levels of risk, rapidly went out of fashion in 2002 when the stock market fell and it became clear that many couldn't afford to pay the returns they had promised. REO, which had invested in numerous other investment trusts, lost around £165 million in under two years.
Aberdeen, one of the largest managers involved in the crisis, has already paid more than £70 million in compensation to investors who lost out in other funds that it had marketed as “low risk”. In December of last year, Chris Fishwick, Aberdeen's former investment manager, was barred from working in the financial arena for seven years for his role in the split capital trust scandal. Fishwick, who resigned from Aberdeen two years earlier, was once described by a member of the House of Commons as “the unacceptable face of the City”.
But REO, which has since sold off most of its UK holdings to become a pure Irish fund, remains unsatisfied. On June 28, the fund finally filed the case with the UK's High Court, on the grounds that “the legal action follows a failure to negotiate satisfactory compensation payments.”
Aberdeen, though, is not taking it lying down, and has described the claim as “wholly without foundation.” At its annual meeting in March, the firm also announced that if proceedings were brought by REO it would “pursue a substantial counter-claim for outstanding fees and compensation of up to £17 million.” What's more, the markets seem to back up this confidence: while the firm's share price plunged by almost a third in April 2003 following the original threat of legal action, it slipped only 2p to 119p when REO filed the case last month.
The legal battle is expected to take up to two years.