FSA fine shows yet again that investment managers must tighten their controls to avoid personal liability
Posted on 22 Nov 2012
Alberto Micalizzi, former chief executive of Dynamic Decisions Capital Management (“DDCM”), has been fined £3 million by the Financial Services Authority and banned from performing any role in regulated financial services. The fine is the largest ever given by the FSA for a case not involving market abuse.
Jerome Lussan, CEO of Laven Partners was quoted on City Wire saying: “We think that this case should be treated as a watershed moment for the global hedge fund industry. It clearly highlights the damage that a total disregard for the rules and conduct of business can cause both to investors and to the hedge fund industry as a whole not to mention the individuals involved in the business.”
As Laven Partners reported in November 2011, Dr. Sandradee Joseph, DDCM’s compliance officer, was also banned and fined in relation to the affair.
The FSA said the Cayman-domiciled fund, Dynamic Decisions Growth Premium Master Fund, Mr Micalizzi was managing lost USD 390 million – 85 per cent of its value – from October to December 2008. It is alleged Mr Micalizzi sought to conceal this loss from investors through entering into contracts for the purchase and resale of a bond linked to Russian oil, which the FSA believes was not a genuine financial instrument.
Mr Micalizzi bought units of the bond at a substantial discount to their actual value and the fund then valued them at this actual value – a method which the FSA believes Mr Micalizzi used to report profits from the bond of over USD 400 million at the end of 2008. This counterbalanced the losses of the fund, leading investors to believe the fund was performing positively.
New investors were sought by Mr Micalizzi despite these losses, from whom he deliberately concealed the fund’s true value – leading one investor to invest USD 41.8 million. Mr Micalizzi also provided the FSA with misleading information after it opened its investigation in August 2010.
In May 2009, the fund was liquidated with assets estimated to be worth around USD 10 million. No money has been received by any of the fund’s investors.
The ruling has been referred to the FSA’s Upper Tribunal, where it may be overturned.
Lussan continues: “As we know, a strict adherence to compliance rules does not automatically lead to a better performance for a particular investment strategy. However, many of these rules are there to ensure that hedge fund managers and compliance officers can monitor and perhaps even prevent losses before events escalate beyond control. For the greater good of the hedge fund industry, it would be beneficial if the companies would begin to see compliance procedures as an integral part of hedge fund operations and risk management. Regulations are a help not a hindrance if used within the operations of any hedge fund business.”