Elusive: Neil Woodford leaves his office in July 2019, dodging Jeff Prestridge’s efforts to talk to him
Hargreaves Lansdown, one of the 100 largest companies listed on the UK stock exchange, faces a potentially costly battle in the High Court over its controversial involvement in the Woodford investment debacle, The Mail on Sunday can today reveal in exclusivity.
The dramatic development of the Woodford saga unfolded late Friday. It was then that a lawsuit was filed in court on behalf of thousands of investors who lost money following the closure and subsequent break-up of the multi-billion investment fund. of Woodford Equity Income books, led by high-level manager Neil Woodford.
Dealings in the £3.8billion fund were suspended in June 2019 after it was unable to meet a £238million redemption request from Kent County Council.
Woodford, considered for many years one of the best stock pickers in the country, was later removed as manager of the fund (three years ago yesterday), the fund closed and most of the assets have sold at a clearance sale, crystallizing the losses of 300,000 investors. Since the fund closed, some £2.5bn has been returned to investors.
Friday’s claim was issued by litigation specialist RGL Management on behalf of 3,200 investors caught up in the scandal. It represents the “first step” in a class action that could result in financial reparation for the victims of the Woodford fund.
What makes RGL’s claim so sensational is its targeting of the Hargreaves Lansdown wealth platform. Other Woodford-related claims already brought in the High Court by rival firms Harcus Parker and Leigh Day have been against Link Fund Solutions, a subsidiary of Australia’s Link Group.
Link Fund Solutions is the company which, as “Authorized Company Director”, oversaw the Woodford fund on behalf of the investors and was supposed to ensure that Neil Woodford complied with the fund’s investment mandate of investing primarily in a portfolio of UK income-producing stocks.
He failed to do so, allowing Woodford to build a portfolio skewed toward illiquid — and hard-to-sell — investments, which culminated in his suspension three and a half years ago. Many of these illiquid investment assets turned out to be disastrous investments.
RGL’s decision to target Hargreaves Lansdown as well as Link represents a significant development in the quest for financial justice for many of the 300,000 investors whose investments were frozen in June 2019.
Indeed, there are concerns about Link Group’s ability to meet any successful claims in court – or pay the relief sought by the city’s regulator, the Financial Conduct Authority.
Last month, the FCA issued a “warning” to Link Fund Solutions after concluding (but not publishing) its lengthy investigation into the circumstances surrounding the closure of Woodford Equity Income.
The regulator has said it is willing to fine Link £50m, and ask him to pay Woodford investors compensation of up to £306m (around £1,000 per investor). .
The warning prompted Canadian firm Dye and Durham to pull out of a takeover of seven Link Group-owned companies, including Link Fund Solutions, as it was told it would potentially have to fund any repairs if it went ahead with the takeover.
By contrast, Hargreaves Lansdown is in very poor financial health. Although its profits fell 26% in the first half of this year, they still stood at £269.2m. Unlike Link, he has the financial means to pay compensation if RGL’s claim is tried and successful. RGL expect their claim against Link and Hargreaves Lansdown to exceed £100million.
Of the 3,200 investors included in the first stage of RGL’s claim, 2,800 were clients of Hargreaves Lansdown at the time the Woodford fund was suspended. On Friday, James Hayward, chief executive of RGL, told the MoS: ‘We are delighted to be filing this first installment of claims, providing those affected with a means of obtaining redress from Link Fund Solutions and Hargreaves Lansdown, whose conduct respective illegal action resulted in significant losses for Woodford Equity Income investors Alexander Weinberg of Wallace LLP, the law firm of RGL, said: “This class action plays a vital role in providing Woodford Equity Income investors with a way to obtain redress.
“Both institutions, Link Fund Solutions and Hargreaves Lansdown, have failed investors – and each has a compelling case to answer.
“RGL is committed to holding both accountable for their respective failures. The claim against both defendants will be pursued vigorously to that end.
Hargreaves Lansdown aggressively promoted the Woodford fund as a ‘best buy’ on its website – from the day it launched in June 2014 until the day trading in the fund was suspended.
At first, the rationale for the fund’s best buy label was based on Neil Woodford’s stellar investing record at asset manager Invesco.
His early track record on the Woodford Equity Income fund was also impressive, pushing the fund’s size up to £10bn – largely thanks to the fund’s hype from the investment platform.
Yet when its own analysts in late November 2017 raised concerns that the fund was increasing its exposure to “small unlisted assets”, Hargreaves Lansdown continued to promote the fund.
In March last year, RGL’s law firm Wallace sent a ‘pre-action letter’ to Hargreaves Lansdown and Link explaining why it intended to sue them. This evolution was also revealed exclusively in the MoS.
Warning: Neil Woodford’s empire tipped to the brink in 2019
The letter sent to Hargreaves Lansdown claimed the wealth manager failed to “provide accurate, adequate and up-to-date information” to clients about the risky nature of the fund’s portfolio ahead of its suspension.
Wallace said this despite the wealth manager’s “persistent and growing concerns” about the fund’s growing exposure to illiquid investments in smaller, unlisted companies.
When the Woodford fund was suspended, 134,000 Hargreaves Lansdown clients held direct stakes in the fund worth just over £1bn. Another 160,000 had indirect exposure through funds holding Equity Income holdings, many of which are managed by the wealth manager as part of its multi-manager fund offerings.
Wallace believes Hargreaves Lansdown has failed its clients in three “key legal areas” – its duty of care to them (required under tort law) as well as its legal and contractual obligations.
Louisa Spice, from Kent, invested £20,000 in the fund between 2014 and 2018 on the back of Hargreaves Lansdown’s glowing recommendation. Louisa, who runs a hot air balloon business with her husband, says she would have switched her stake to another fund if the wealth manager had told her he had concerns about the risk of holdings hidden under Equity’s hood Income.
“I am convinced that justice must be served,” she added. “Investors like me who lost through no fault of their own should be properly compensated.”
On Friday, another Woodford Equity Income investor – a pharmaceutical consultant from Glasgow – said Hargreaves Lansdown was the “biggest culprit in this whole fiasco because they recommended the fund until the day it was suspended”. He added: “The day of judgment is in sight.”
However, like all investors caught up in this scandal, he may have to wait a little longer. Link has yet to confirm whether he will appeal the FCA’s fine and compensation claim.
RGL’s claim could also drag on if Link and Hargreaves Lansdown refuse to settle – and choose to go to trial instead. This would mean that a court ruling would not be made until 2025 at the earliest.
The next key date is in December, when a judge will decide how to proceed with the claim. The three demands made by Harcus Parker, Leigh Day and RGL are likely to be combined in a “group litigation order” and heard as one (Harcus Parker and Leigh Day have already joined forces).
On Friday, the MoS invited Hargreaves Lansdown and Link to comment on RGL’s filing of a complaint against them in the High Court. They chose not to comment.
Woodford Equity Income investors can register to join the RGL claim through the woodfordlitigation.com website. Investors will only pay a fee if the claim is successful.
RGL will take 25 percent of any compensation in fees. This compares to 30% (Leigh Day) and around 42% (Harcus Parker). Meanwhile, it remains unclear whether the FCA will punish Woodford for his role in the debacle.
Some links in this article may be affiliate links. If you click on it, we may earn a small commission. This helps us fund This Is Money and keep it free to use. We do not write articles to promote products. We do not allow any business relationship to affect our editorial independence.