A Jersey-based currency trader lost his investors $27 million while telling them they were making money. Now the trader is being sued by Bermudian Michael Marsh, whose firm raised most of the money. Below is a story on the scandal which appeared in the Wall Street Journal yesterday.

By Michael R. Sesit JERSEY, Channel Islands -- Brian McGuire thought he had found the perfect place to invest.

An anaesthesiologist in Billings, Montana, Dr. McGuire put $100,000 into a fund that seemed conservative, was audited by a famous accounting firm and was linked to a venerable Swiss bank. The fund, which traded currencies, was managed on an offshore financial centre promoted as one of the world's most reputable. And part of the deal was that the most an investor could lose, if all went wrong, was ten percent.

Dr. McGuire didn't lose ten percent. He lost 95 percent. It was "the largest part of my savings'', he says. In all, he and the other 81 investors, about half of them Americans, saw $27 million vanish.

But this was more than a case of lousy fund management. Far from being warned of widening losses by the trader who was handling their money, the investors had been given reports showing it was steadily growing.

Another thing they had been kept in the dark about: The trader had a secret fee-splitting agreement with the Swiss bank that held their money.

The trader was arrested last month as he was about to leave for Dubai. But that was more than 2 1/2 years after the situation first came to light. The long delay in prosecuting the case -- along with a decision by Jersey finance regulators not to investigate the bank -- is threatening a cosy financial setup that has made this 45-square-mile island off the coast of France prosperous.

"There's a lot at stake politically here,'' says Stuart Syvret, a senator in the Jersey parliament. "There appears to be a large coverup going on that implicates some of Jersey's most powerful politicians and civil servants.'' Jersey and the other Channel Islands, under an odd arrangement dating back to William the Conqueror, are part of Britain but largely self-governing. Jersey has no sales, wealth, gift or inheritance taxes. Most investment profits are exempt from its 20-percent income tax.

These tax laws, plus far-ranging bank secrecy, give the island a lot of financial allure. It has 77 banks, whose soaring deposits now total $140 billion, and is home to some $270 billion in mutual fund and trust assets.

With all this commercial activity, Jersey runs a budget surplus and has less than one percent unemployment.

But now, burned investors are spreading the word that Jersey's reputation as a financial centre that protects investors is overrated. "The experience we've had certainly puts into question the security of all these (Channel) islands,'' says Ian Weedon, a Swiss-based investor who lost heavily in the currency-trading fund.

Investors like him were recruited by promoters touting the performance of a Nottingham, England, currency trader named Robert John Young, who, by his own calculation, achieved a 30 percent average annual return from 1984 through 1988. The invested money was deposited in Cantrade Private Bank Switzerland (C.I.) Ltd., a Jersey subsidiary of Switzerland's largest bank, Union Bank of Switzerland.

Dr. Young, a Scottish-born econometrician of hefty girth, traded currencies on the investors' behalf, with Cantrade holding their money as collateral. His method didn't call for making risky bets. If losses ever reached ten percent, he was supposed to stop trading, notify the fund trustee and await further instructions.

From 1988 through 1992, Dr. Young claimed annual returns of 11 percent to 21 percent, according to an affidavit later filed in a Jersey court. His transactions for 1990, 1991 and 1992 were reviewed by Alfred Williams, a Nottingham-based partner of Touche Ross & Co., now Deloitte & Touche. The accountant also took part in an investment seminar in Bermuda at which promoters cited Dr. Young's returns and raised more money.

"Touche Ross was pointing out that they audited the whole thing regularly, that nothing could go wrong because they were there,'' says Robert E. Wallace, a retired US Army colonel in Miramar, Florida, who was a losing investor.

Dr. Young reported these double-digit gains to the fund's trustee, for which he received $2.3 million in profit-related commissions, according to the trustee. But much later, Dr. Young would acknowledge, in an interview with lawyers and accountants for the trustee, a Geneva-based firm called Mayo Associates SA, that "there were losses on the accounts when I prepared the valuations so that they showed a profit''.

Another thing Dr. Young wasn't telling the trustee early on was that he had an agreement with Cantrade, the bank in which the trustee had deposited investors' cash, to split commissions. Nor that Cantrade was the counterparty to nearly all of his currency trades. All this subsequently was acknowledged by Cantrade's lawyers in court or letters to the trustee's lawyers.

The fee-splitting arrangement "was a clear invitation to `churn'',' because the more Dr. Young traded, the more Cantrade paid him in commissions, charges Bermudian Michael Marsh, president of Troy Associates Ltd., which raised the investor money and retained Dr. Young to invest it. Mr. Marsh adds that Cantrade, by being the sole party that Dr. Young traded with, made money every time he made a bad trade. "What's odd is how consistently Young lost money,'' Mr. Marsh says. He adds that "Cantrade continued to recommend Young even as he was losing money''.

But Dr. Young told plaintiffs' lawyers that Cantrade traders went further than just splitting fees with him: They sometimes booked unauthorised trades to investors' accounts. "They chose the rates at which the deals went through,'' he said. "They always made a loss for the customer.'' Copies of his February 1995 interview with the lawyers have since been supplied to Jersey law-enforcement authorities and regulators, and referred to in Jersey Royal Court hearings, says an attorney for Mayo, the trustee.

Troy Associates is suing Cantrade and Touche in Jersey Royal Court, as is Mayo. Clive Tomes, a Jersey accountant hired by the plaintiffs, says Cantrade's reports to the trustee were "appalling -- the fact that they debited the capital account at various times with massive losses and the fact they didn't even think the client should be informed of that. It also took a long time before they started sending complete and accurate information to their clients.'' During a September 1993 dinner, a Cantrade official casually mentioned to Mr.

Marsh and another official of Troy that the money in the investors' account was minuscule, Mr. Marsh says.

Three months later, lawyers and accountants for Mayo and Troy, accompanied by court officials, entered Dr. Young's Jersey home looking for records. They discovered that, whether or not Dr. Young's trading style was conservative, his lifestyle wasn't. In the lavishly decorated home they found about 40 Gucci handbags, five Rolex watches, much jewellery and an extensive wine collection.

Dr. Young had bought his wife a Mercedes and leased a Porsche, and in the final month of 1993, he had run up an American Express bill of $144,000. The following year, he spent $80,000 at two swank London hotels.

Mayo and Troy filed a suit against Dr. Young and his company, Anagram (Bermuda) Ltd., which is still pending. The trader returned to Nottingham.

Last month, a lawyer for the plaintiffs learned that Dr. Young was about to depart for Dubai, and notified authorities.

British Police arrested him, and Jersey Police brought him back to the island, where he was charged with concealing information and making false statements to investors. He pleaded not guilty and is free on bail. His lawyer, asked a series of questions, didn't provide answers. But in his interview with the trustee's lawyers, Dr. Young said at one point: "It is not true that I lost all that money.'' Mayo and Troy accuse Cantrade of artificially inflating the exchange rates at which they sold currencies to Dr. Young and then splitting the inflated amounts with the trader. Attorneys for Cantrade concede that the bank and Dr.

Young split fees -- they have told plaintiffs' lawyers that Cantrade paid him $3.29 million -- but contend that the rates Cantrade charged were "acceptable'' and better than the investors could have gotten elsewhere.

A spokeswoman for Cantrade's parent, UBS, won't address specific allegations because of the litigation. "Cantrade wasn't directly involved in investors' losses,'' says the spokeswoman, adding: "Cantrade denies being responsible for any investor losses.'' In dealing with investors and their lawyers, UBS has sought to distance itself from Cantrade, which, like itself, is based in Zurich. But Cantrade's Jersey unit has the same address, telephone number and managing director as UBS's own Jersey branch. And Cantrade, in advertising and at investment seminars, has often mentioned its ties to UBS and UBS's triple-A rating. One British investor, William McCollum, says: "The UBS connection was why we went into this, because I hadn't heard of Cantrade.'' The office of Mr. Williams, the former Touche accountant, refers questions to Deloitte & Touche. A spokeswoman for the firm says, "This is not a case about what Deloitte & Touche did or didn't do. Ultimately the question is about the performance of investment managers, trustees and the person they employed to deal on their behalf. We are satisfied that we will not be found liable.'' As for Jersey's regulator of financial institutions, the Finance and Economics Committee, it decided two years ago not to investigate Cantrade; instead, it simply asked that Cantrade's own auditors review the bank. Yet about the same time as the FEC was declining to investigate Cantrade, it granted Cantrade's owner, UBS, a license to open its own branch on the island. The FEC's president, Pierre Horsfall, says an investigation wasn't done because it would have meant shutting the Cantrade office down.

Mr. Horsfall had been a Cantrade director from 1986 through 1990. His predecessor as FEC president, Reg Jeune, is a consultant and former senior partner of Cantrade's law firm. Both men also are senators in Jersey's parliament. This sort of overlap among politicians, regulators and bank directors is common in Jersey. At one point five years ago, Sen. Jeune served on the boards of 36 companies while also head of Jersey's most powerful parliamentary committee, according to government filings.

Sen. Horsfall says overlapping relationships aren't improper because if a regulator has an interest in a company being looked at, he will simply "declare an interest and withdraw''. Sen. Jeune says that while he generally doesn't feel regulators should sit on boards of financial institutions, "it's a very open situation in Jersey. It's a small island; everybody knows what everybody is doing and it's never been thought necessary'' to change things.

This same informal linkage of officialdom with the private sector was on display when Dr. Young sought a hard-to-obtain permit to live and work on Jersey. Cantrade sponsored him, and the island's most senior civil servant, Chief Adviser Colin Powell, guided his housing application through the bureaucracy and supplied a rationale for granting the permit, according to internal government documents. Mr. Powell has been the architect of Jersey's push into financial services.

"Under normal circumstances, Robert Young wouldn't have been granted a housing license nor a licence to do business on the island,'' a senior Jersey official says.

To him and to some other critics, the Young/Cantrade affair exposes Jersey for what it is: a small island living off lax regulation and political interference that major financial centres wouldn't tolerate. Jersey, for instance, has no law requiring that banks know the beneficial owner of deposits, a gap that Switzerland closed a few years ago and that regulators say is almost an invitation to money laundering.

Jersey is an island that until two decades ago lived off boat building, cod fishing, agriculture and tourism. It is run by a group who, although they form a social and political elite on Jersey, are mostly small business owners and farmers who now find themselves overseeing an industry of global scope involving billions of dollars. "By and large,'' says the senior civil servant, "they are totally out of their depth''.

Royal Gazette file photo MICHAEL MARSH -- Suing Jersey currency trader