It has been reported that three ultra-rich clients of the collapsed Scottish trading house Echelon Wealth Management are suing IG Group for damages amounting to more than €25 million (£21.3million).
The parties appear to have lost out when Echelon Wealth Management, a Glasgow-based company run by managing director Steven Alexander, went into liquidation in October 2008.
Our undertanding, that, as part of its usual business practice, IG Markets closed out trading positions when margin calls were not met in the same way as it does with all clients. IG then absorbed an impairment charge against the client.
Echelon specialised in CFDs, a derivative product that allow investors to take a position on shares without owning them directly. Clients of Echelon were covered by the Financial Services Compensation Scheme, which paid out losses up to £48,000.
Echelon used IG Group, the biggest spread-betting and CFDs house in the industry, to place trades. The London-listed company doesn’t seem too concerned though and is dismissing the claim. IG stated it had no business relationship with the Echelon customers and in a statement added: ‘IG considers the claim to be speculative and without foundation and will defend itself vigorously. It is not expected this matter will have any material impact on the group.’
The court documents however allege that Echelon had a ‘white label agreement’ arrangement in place with IG Group. In addition, the three claimants – a Swiss investor whose name is Lucien Selce and two investment companies, Stokors and Phoenicia – are seeking damages after losing cash they believed Echelon had ring-fenced in segregated IG deposit accounts, only for those funds to be utilised to cover other Echelon clients’ losses. The matter looks complicated indeed but the IG Group is still confident there is no case to answer. An IG spokesman says: ‘IG has no contractual relationship with the claimants.’
Numis Securities said in a note: ‘We do not believe that this will go to court and if it does – given IG acted in line with its contractual conditions of business – we believe they will win.’ Analysts at Numis Securities today noted that IG held a £222 million cash balance as of 31 May 2010 so even if a payout was necessary, it would have ‘next to no impact’ on the group.
The news comes just days after IG confirmed a high-profile sponsorship deal for pro cycling squad Team Sky. The sponsorship was intended to herald a positive brand-building exercise, as its logo will feature on the squad’s kit at many of the top cycling events this year, including the Tour de France.