Morgan Grenfell Asset Management (MGAM) was doing well in 1994. Pension assets managed by the company's Investment
Question:
Young bought $30 million of stock in this gemnot at a discount, as might be expected for an extremely risky bulk purchase, but at a $2-a-share premium. Young also managed to circumvent a Securities and Investment Board regulation forbidding a fund from owning more than 10 percent of any company. He did this by establishing a system of companies, apparently through a Swiss law firm. These companies were paired so that each owned some 90 to 95 percent of its partner company, while Young purchased the other 5 to 10 percent for the funds under his control. In September 1996, the London regulators began investigating the valuation of assets in MGAM's three largest European funds. Trading on the funds shut down for three days and resumed only after Deutsche Bank, the parent company, replaced the questionable assets in the fund with $300 million in cash. Nonetheless, about 30 percent of investors left the funds within the next few weeks, taking $400 million with them. The turmoil in the wake of this scandal was enormous. MGAM had to compensate more than 80,000 investors and was fined by the City of London regulators.
Establishing the value of the compensation required two teams, each with 100 members, from two major accounting firms. Questions about how Young had been allowed to get away with his eccentric trading for so longespecially given reports that he had been cautioned about breaching investment guidelines months before the suspensioncontinued to haunt MGAM. Young, meanwhile, briefly returned to the limelight a few months later, when he made his first court appearance wearing a dress and full make-up. Whatever the motivation behind this switch in gender polarity, it served as a suitably surreal coda to an affair that had been as perplexing as it had been expensive.
As a chief risk officer, what considerations would you identify for the case above, state the central issue the case is describing and highlight the problems that need to be addressed. Do you agree or disagree with the solution described in the case and provide support for your position? In conclusion, provide a concise summary of the items you considered from the case.
Financial Reporting Financial Statement Analysis and Valuation a strategic perspective
ISBN: 978-1337614689
9th edition
Authors: James M. Wahlen, Stephen P. Baginski, Mark Bradshaw