From Madoff to Woodford
Written on 22/04/2021


Ask Robert De Niro who played in the Wizard of Lies film of the fraudster!  Those who invested with Bernie’s funds – and lost the lot - include Nomura, Santander in Spain, Bradford and Bingley and BNP Paribas, the International Olympic Committee, Mark Zuckerman who owned the New York Daily News, as well as from the film industry John Malkovich, Larry King and Steven Spielberg.  Nicola Horlick embarrassingly fell for it when others were already questioning the performance.  My own business mentor and former NED, the late George Hayter, who was operations director on the LSE during Big Bang, was offended when his good friend Bernie declined to accept his son’s application for work experience!   

And so to Woodford.   I recently read the History of Woodford by Owen Walker  - “Built on a Lie.”  Such lie is the liquidity trap inside OEIC funds, that was referred to by Mark Carney as just that – “built on a lie”.  Here too many were taken in - not least the regulator.

Co founder and CEO Newman’s application to the FCA was leaked to the FCA, and projected that in their first year the company would reach £9.75bn of assets, which would rise to £17bn in three years.  That is a VERY large sum of money to invest in illiquid alternative assets.

There is nothing quite like the common sense approach of the IFA when it comes to helping clients.  You’re worth the money – and no surprise to see IFAs largely avoided Woodford, or at least extracted their money in good time.  Over half the funds were invested by either HL or SJP.  

The ACD was, of course, Capita – already responsible for the £54m redress bill for Arch Cru in 2009, which allowed it to escape its own £4m fine, and another £79m disaster at Connaught – some of which was picked up by the IFA community via the FSCS levy.   So why on earth did the FCA think Capita would do the job?  Woodford had originally asked the FCA for permission for his funds to use Host Capital.  This was refused, and Woodford was effectively forced to use Capita.  Capita changed its name to Link, and thus avoided a lot of negative publicity on Woodford.  

SJP paid 0.3% for its own parallel fund, according to the Wizard of Lies author Walker, and charged customers 1.5% for the fund.  No surprises there - they live in daily breach of Cobs 6.1A.9R because the adviser charges disclosed are not representative of the cost of the services associated with the personal recommendation.   

SJP removed £3.7bn from Invesco and handed it to Woodford at inception!  Not bad for a new start business emerging from the wreckage of Invesco, who had already been fined for mandate breaches inside their funds – much of it allegedly attributable to Woodford, whose exit co-incided with the fine.

You can expect liquidity to feature more and more in coming years, and a warning on this should be posted in all SR letters.  “You should be warned that conversion of the holding back to cash is not certain, as liquidity trap exists such that if all investors seek to exit at the same time, the holdings may take time to sell.  This is particularly acute risk in property based funds, but is also apparent in ordinary equity funds that have holdings in unlisted securities, and, in extreme circumstances, in listed securities too.” 

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