Towry Law International, a financial advisory company owned by UK-based and London-listed HHG, has agreed to pay HK$255.9 million ($33 million) ex-gratia to Hong Kong investors who lost money on mis-sold hedge funds in 2002. Towry Law did not admit any liability in the settlement arranged by Hong Kong's Securities & Futures Commission (SFC); an ex-gratia payment is made as a favour not as an obligation.

The SFC says Towry Law's offices in Hong Kong will remain open until the payments are completed, which it anticipates will be by the end of March 2005. The payments will be covered by a combination of insurance and funds already held in provision by Towry Law and its parent, which owns Henderson Global Investors. Towry Law's spokeswoman declined to name its insurer, or detail how much of the settlement will come from HHG's pocket, except to say, "It is not expected there will be any further material impact on HHG."

Towry Law had once been the region's leading independent financial advisor, with a long history of serving UK expatriates but in the 1990s also making inroads into the growing market of Chinese in Hong Kong. In 2002, however, two hedge funds that it had sold to clients were suspended from trading.

The Global Diversified Trading fund and Global Opportunities Trading funds, managed by Anthony Wong of AMFA in Hong Kong, had lost all their clients' money. The police have been looking for Wong since then, but he has disappeared. The SFC punished both Wong and AMFA in 2002 for breeching the takeover code, and industry executives suspect fraud.

Towry Law clients also lost money on leveraged investments into funds managed by Circus Capital. The SFC continues to discuss with Towry Law investor complaints about the sale of these and other products, and will consider a public statement later, but this settlement excludes those cases.

The SFC had alleged that Towry Law had conducted insufficient due diligence on the AMFA funds, sold them to clients whose risk tolerance and investment objectives didn't match the two hedge funds' risk profile, failed to investigate problems with the funds, and failed to advise clients when it became clear the funds had problems.

Now the SFC has decided to settle disciplinary proceedings because it says the agreed ex-gratia payments offer substantial mitigation, because the senior Towry Law executives responsible for involvement with the tainted hedge funds have been replaced, and because the new management, led by Hong Kong managing director Ed Cooley, has cooperated with the SFC.

Alan Linning, executive director of enforcement at the SFC, says, "Last year I said that investment advisors were an enforcement priority. This remains the case. We have received numerous complaints from investors alleging that they were mis-sold a variety of products...mis-selling is unacceptable and will attract tough disciplinary sanctions...we have a sense that there is too much emphasis on earning commission and too little on ensuring suitability." He adds investors must be aware of their responsibility for reviewing investments to ensure they are appropriate.

Outside executives from the fund management industry say the SFC may have been keen to arrange a settlement in order to avoid opening a Pandora's box of American-style litigation. Towry Law was keen to end this embarrassing episode.

The firm's future is in doubt. Many of its agents have moved to ING Financial Planning, which market sources say is considering buying Towry Law's rump business, which remains considerable. If ING was able to retain that business, it would become one of the biggest IFAs in Asia and attain a scale that could otherwise take years to build. ING officials were not available for comment as this story went to press.

Investors in the Global Opportunities Trading fund will receive 90% of the capital invested, plus compound interest of 1% over the HSBC US dollar deposit rate prevailing from the date of investment to the date this settlement offer is accepted, which the SFC calculates will be $12.85 million if all investors accept. The Global Diversified Trading fund's investors will receive 80% of the capital plus the same interest rate, which should amount to $20.07 million. Accepting payment means investors waive the right to make a claim against Towry Law or its officers. Nor will they receive any payout from the liquidation of the two funds.

Payments will be in US dollars, as the two funds were denominated in greenbacks. Investors not satisfied with this deal can bring their own legal proceedings, although they can't accept the ex-gratia payment. Towry Law will contact its investors this month, and give them 60 days to agree. The SFC will monitor Towry Law's administration of the payout schemes.