The case of the NOVA Money Market Fund: The largest lender in the hands of the borrower

Prague, 1 June 2021 - The NOVA Money Market Investment Fund is the largest creditor of Arca Investments, which is the subject of local insolvency proceedings at the Municipal Court in Prague. The registered claim amounts to CZK 664 million, and even the only secured creditor in the form of J&T Bank does not reach this amount of claim (for J&T it is CZK 451 million). However, according to the analysis and findings of Langmeier & Co., the role of NOVA Money Market in the entire case is much more fundamental than it may seem at first glance at the list of claims in the insolvency register.

The story of the NOVA Money Market Fund contains two main findings:

1) Arca Investments was indeed operating as a so-called black bank.

2) The Czech National Bank should deal with the NOVA Money Market case, as it is required by law to supervise this fund and investor deposits in excess of half a billion crowns are at risk.

How did Langmeier & Co. arrive at these findings? In the following text we will try to describe the case as clearly and concisely as possible.

Linking Arca Investments and NOVA Money Market

NOVA Money Market is a so-called qualified investor fund. This means, among other things, that the smallest possible investment is CZK 1 million. Moreover, the fund is non-self-managed, its manager and administrator is the investment company REDSIDE. What is key, however, is that NOVA Money Market and REDSIDE are an unacknowledged part of the Arca Investments group.

Arca Capital Finance Group, a member of the Arca Investments group, is a 9.52% shareholder of the REDSIDE investment fund, according to the list of shareholders present on 25 November 2020. In addition, Rastislav Velič, the current Chairman of the Board of Directors of Arca Investments, was Chairman of the Board of Directors of the NOVA Money Market fund from 20 January 2016 until 31 December 2020.

Arcy Fund

"If you look carefully at the claim application from NOVA Money Market in the Arca Investments insolvency proceedings, you will see that in January 2017, the Fund, specifically Sub-Fund 3 and Sub-Fund 4, entered into a framework agreement with Arca Investments to provide financial assistance. These were then used by Arca Investments on several occasions. Most recently on 24 February 2020, when it borrowed CZK 17.5 million from the NOVA Money Market Fund. In total, it borrowed almost CZK 617 million over three years,"
calculates JUDr. Jan Langmeier.

According to the application for the insolvency proceedings, all these claims should be secured by other claims, namely against Silverside, a.s., a company based in Bratislava. This company provides so-called quick loans. Above all, it belongs to the Arca Investments group, which is its subsidiary. "This brings us full circle. To put it simply, Arca Investments borrowed almost CZK 617 million from investors, i.e. from the public, through its unacknowledged fund NOVA Money Market. It borrowed it for its own purposes, to finance its own group. According to our analysis, the terms and conditions of the fund's statute have been violated and the clients' funds are now at high risk. This really should not happen with a regulated fund and the manager, REDSIDE, should also be held responsible," says Jan Langmeier.

And more evidence for the claim that NOVA Money Market is a fund that is an unacknowledged part of the Arca Investments group? In the current reporting of the REDSIDE investment fund, which manages and administers the NOVA Money Market fund, the asset value of the NOVA Money Market fund as of 31 December 2020 is CZK 667 million. The receivable from Arca Investments amounts to CZK 664 million. The vast majority of the assets of the NOVA Money Market Fund are thus
receivable from Arca Investments. Jan Langmeier added: "It is obvious that the sole purpose of this fund was to finance the Arca Investments group."

Deceiving Investors and Protecting Debtor's Interests

There are other implications of this development. Hundreds of NOVA Money Market investors may lose hundreds of millions of crowns. Moreover, these investors invested with the knowledge that, although it was a risky investment, they were assured by the fund that the risk was not too high and that, in the worst case, they could lose only a fraction of their investment. This is clear from the presentation of the fund that we have. In this presentation, the investment in the fund (or sub-fund) is rated six on the aggregate
risk indicator. Which admittedly indicates a higher risk rating, as this scale ranges from one to seven, with seven being the riskiest. However, just below this scale, the presentation includes a note: "However, the real riskiness of the fund is lower - according to the indicator, which takes into account the historical evolution of the value of the investment, the riskiness is at level 3 out of 7."

A completely misleading indicator in the NOVA Money Market presentation is the so-called Performance Scenario. This has four levels from favourable to stressed. And only in the stress stage is a negative annual return given, namely only - 1.53%.
Since almost all of the assets of the NOVA Money Market fund currently consist of receivables in the insolvency proceedings of Arca Investments, where estimates of possible satisfaction of receivables vary, but even with a very optimistic development it can be at most low tens of percent of their value, it is clear that the reality of the return on investment in NOVA Money Market will be somewhere else.

You won't see your money for two years

The current situation has already been reflected in the actions of REDSIDE, which recently revalued the assets of the NOVA Money Market sub-funds to 46% of their book value. REDSIDE has also decided to repeatedly suspend the issuance and redemption of investment shares issued to Sub-Fund 3 and Sub-Fund 4 until 3 May 2023. This decision means that investors will not be able to recover their invested funds for another two years! Apart from this official information, however, REDSIDE has been providing only general and unsubstantiated information for some time now in order to buy more time and reassure investors. Their position continues to deteriorate.

Moreover, suspending the issuance and redemption of investment shares for such a long period of time is contrary to the statutes of both sub-funds, which are available on REDSIDE's website. The latter may not suspend for more than three months. "According to our internal findings and estimates, the revaluation of the assets to 46 percent of book value is only the beginning and there will be another, again negative, revaluation in the future. Of course, this
is a consequence of the uncertain proceeds from the insolvency proceedings of Arca Investments," explains Jan Langmeier, whose firm represents several NOVA Money Market investors and has begun to focus intensively on this case.

"More than half a billion crowns may remain outstanding behind the NOVA Money Market fund, which hundreds of investors have invested in the fund. The difference with Arca Investments is that this fund is legally supervised and controlled by the Czech National Bank. And it should act. It should check whether the fund, or its manager REDSIDE, has misled investors and whether it has traded in their best interests. Last but not least, it should assess whether the two sub-funds are in fact bankrupt. We have therefore sent a letter to the CNB asking it to look into the matter, we have also written directly to the Governor of the CNB and we are preparing a joint approach for all investors in these sub-funds who have contacted or will contact our office."

A tool to control the creditor pool

But the story of the NOVA Money Market Fund has another background. This fund, as a creditor of Arca Investments, is applying to the provisional creditor fund in the insolvency proceedings. This raises the suspicion that the debtor, through this major creditor, may try to gain an important position in the creditor body, given the above-described links with the management of the Arca Investments group.