Morgan facing claims avalanche from investors

Watchdog hires auditors to check whether compensation should be paid in wake of scandal

Morgan Grenfell, the fund management firm whose European funds are being investigated for fraud, could face an avalanche of compensation claims from past and present investors who may have lost money in the course of the past year.

Among those may have valid claims are investors who have sold off more than pounds 180m of their holdings in Morgan Grenfell unit trusts in the past two days, 14 per cent of their total value before trading was suspended earlier this week.

Claims could cover the period when Peter Young, the fund manager suspended by Morgan Grenfell, breached rules on the proportion of unlisted securities he was allowed to hold in the two unit trusts he was responsible for. This would permit former unit-holders who disposed of their holdings prior to the suspension of trusts at the beginning of the week to table claims.

The potential extent of claims came as Morgan Grenfell said redemptions, which reached pounds 83m yesterday compared with a pounds 100m sell-off on Thursday, appeared to be slowing down. A spokesman said: "We believe investors are getting the message there is no need to panic."

But he declined to speculate on whether the company believed sell-offs would come to a halt next week.

The company yesterday sent letters to 85,000 investors in three trusts, including Europa, the one managed by Mr Young's colleague Stewart Armer, giving them information for the first time about what was happening to the funds.

A letter from Graham Kane, managing director of Morgan Grenfell Investment Funds, said: "I would like to make it clear from the outset that fund managers will meet all their liabilities in respect of any irregularities in the three funds.

"These possible irregularities relate to the value of certain unquoted securities in the three funds." If Morgan Grenfell were to meet compensation claims this would be in addition to the pounds 180m stumped up by its owner, Deutsche Bank, the German banking giant, which bought from the trusts the questionable unlisted securities first acquired by Mr Young.

However, despite this cash injection, the company's letter to investors admitted that the price of the European Growth Trust fell by 3.75 per cent between Friday 30 August and noon on Thursday. The value of its Europa Fund dropped by 3.9 per cent over the same period.

Morgan Grenfell spokesman said the company was working closely with its regulator, Imro, to ensure unit-holders were properly compensated. The basis for compensation and the amounts would become clear in the next few weeks, as the full extent of Mr Young's activities are investigated.

Phillip Thorpe, chief executive at Imro, said the regulator was in process of appointing forensic accountants to go back and analyse the funds and determine whether compensation is payable.

He said if it appeared that the fund had been trading on false prices then that was a matter under which compensation would be payable by Morgan Grenfell. But Mr Thorpe added that it might take some time before the matter could be fully resolved.

Imro, as well as regulating fund managers and their companies also supervises the trustees - the firms that provide the checks and balances of the fund management firms.

Mr Thorpe said the regulator might need to look again at its rules for trustees after the Morgan Grenfell debacle.

"It has to be accepted we will need to look at the way in which trustees and fund manager have interacted," he said.

General Accident was the trustee to both of the funds Mr Young managed until February and July this year. In theory, Imro could levy the same penalities against trustees as it could against fund managers - fines, explusions or reprimands.

Mr Young is said by his employers to have defied orders to dispose of doubtful securities in his funds, many of them in high-risk Scandinavian firms, by selling them at a loss to Luxembourg holding companies he had himself created.

The two funds he managed, including the pounds 800m Morgan Grenfell European Growth Unit Trust, suffered substantial losses from the fictitious sales, so that Mr Young could claim to have reduced holdings in unlisted stocks below the 10 per cent limit imposed by regulators.

Most legal experts believe that the least the company will try to do will be to offer redress on the basis of "tort", whereby unit-holders are returned to the position they were in before they invested their money. One lawyer said: "Compensation would be for losses arising from a breach of financial services regulations in relation to the rules on unlisted securities."

This could be done by working out what the fund might have been worth without the dubious investments. Those who could be entitled to claim included all those investing from the moment at which breaches occurred. This might include interest that might have been paid on any lump sum invested.

A lawyer said claims might be made on grounds that the company and Mr Young were in breach of contractual duties.

Comment, page 21