FIRST Investments, the fund management company that launched the controversial FIL Leveraged Bond Fund, has issued a $438 million claim for damages against its former advisers, Trust Company of the West (TCW). The company is alleging that TCW breached its duty of care to both the company and shareholders of the Leveraged Bond Fund and MBS Capital Secured, a bond fund offered to institutional investors. The Leveraged Bond Fund, which was touted as a low-risk investment, proved disastrous for many small investors after its price plunged and trading was suspended by the Securities and Futures Commission (SFC), the territory's chief financial regulator. Aster Chow, a director of First Investments, said: 'We will be alleging that the fund losses were caused by TCW's failure to act consistently with the representations it made to us and the shareholders.' TCW is alleged to have claimed that its funds could absorb fluctuations in United States interest rates without a dramatic impact on their fund's performance. A senior executive of a company closely linked to the fund said: 'If the action on behalf of the fund is successful, the value of the fund will rise and the value of the shares will go up.' It is unknown whether former investors would be able to share in any compensation. The Leveraged Bond Fund, launched in October 1992, invested in collateralised mortgages which are complex securities based on packages of home mortgages. TCW, which has $31 billion in funds under management, was appointed to act as the investment adviser. The company was billed as a leading manager for government mortgage-backed bonds. During its first 12 months, the fund was one of the territory's top performers and won the First Investments Fund Manager of the Year award. Its share price fell in April last year after rising interest rates in the US hit government and corporate bond markets. After talks between First Investments and the SFC, the fund suspended trading for five months to protect investors from being forced to redeem holdings at unrealistic prices. The company said it was forced to seek the suspension after lenders to Askin Capital Management, another fund management company based in New York, dumped more than $66 million of collateralised mortgages on the market and boosted daily market volumes 15-fold. This resulted in a five-fold widening of the bid-offer spread to 30 per cent. Neither First Investment nor the bond fund has any association with Askin Capital. Leveraged funds not only invest client money but borrow additional cash or use derivatives to produce greater volatility. First Investments described the fund as a 'conservative, compound growth oriented investment'. A number of Hong Kong-based investment advisers, who had recommended the fund as a conservative holding, were caught out by the fall. TCW was unavailable for comment.