The Financial Services Authority has levied a £3m fine against hedge fund CEO Alberto Micalizzi, the largest fine for an individual in a non market abuse case. It has also banned him from performing any role in regulated financial services.
Micalizzi was the chief executive officer and a director of Dynamic Decisions Capital Management (DDCM), a hedge fund based in London. Between October 2008 and December 2008, DDCM's main fund suffered "catastrophic losses" of over £249m, around 85 per cent of its value.
The FSA believes that, to conceal the losses, Micalizzi began lying to his investors about the actual market position of the fund, and entered into a number of dodgy contracts in an attempt to make back the money. The contracts, which the FSA believes were not for a "genuine financial instrument", a fact which Micalizzi apparently knew, created large artificial gains for the fund. They were bought at "a deep discount to their face value", so that when the fund marked them up to the actual market price it created ostensible profits of over £255m, enabling it to report modest gains each month in late 2008 when it was actually losing hundreds of millions of pounds.
The bonds with Micalizzi bought, in what was apparently a last ditch attempt to stave off the death of his company, were described by Reuters (pdf) in August 2011 as:
$500 million of highly illiquid paper purportedly issued by a company in a trailer-park suburb of Phoenix, on behalf of a small Australian commodities firm -- and backed by the proceeds from $10 billion of diesel from the tiny autonomous Russian republic of Bashkortostan.
The FSA also alleges that, by providing "false and misleading information", Micalizzi deliberately hid the actual value of the fund from one new investor who then put over £25m in on 1 December 2008, after the losses had been mounting for two months. Just five months later, the fund was put into liquidation with total assets worth little over £6m.
The FSA's acting director of enforcement and financial crime Tracey McDermott said:
Although investing in hedge funds can carry greater risk than many other asset classes, investors in funds controlled by regulated hedge fund managers are entitled to be treated with exactly the same honesty and integrity as other firms. Alberto Micalizzi’s conduct fell woefully short of the standards that investors should expect and behaviour like his has no place in the financial services industry and we are committed to tackling it wherever we find it.
Alberto Micalizzi, for now, will have to go back to his other job, teaching economics at Bocconi University in Milan.