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The Financial Services Authority (FSA) has today published a decision notice indicating that it has decided to fine Alberto Micalizzi £3 million and ban him from performing any role in regulated financial services for not being fit and proper. This is the FSA’s largest fine for an individual in a non market abuse case.
At the relevant time, Micalizzi was the chief executive officer and a director of Dynamic Decisions Capital Management Ltd (DDCM), a hedge fund management company based in London.
The FSA has also decided to cancel the permission of DDCM to conduct regulated business. The FSA believes DDCM is failing to satisfy the threshold conditions and is not fit and proper, because it failed to ensure that its business was conducted soundly and prudently and in compliance with proper standards.
Micalizzi and DDCM have referred this matter to the Upper Tribunal (the Tribunal) where they and the FSA will each present their case. The Tribunal will then determine the appropriate action for the FSA to take. The Tribunal may uphold, vary or cancel the FSA’s decision. The Tribunal’s decision will be made public on its website.
The decision notice for Micalizzi, dated 20 March 2012, states that between 1 October 2008 and 31 December 2008, the master fund (the Fund) managed by DDCM suffered catastrophic losses of over USD390 million, approximately 85% of its value. In the FSA’s opinion, in late 2008, to conceal the losses, Micalizzi lied to investors about the true position of the Fund and entered into a number of contracts, on behalf of the Fund, for the purchase and resale of a bond (the Bond contracts). The FSA believes that the bond was not a genuine financial instrument and that Micalizzi was aware of this when he entered into the Bond contracts.
In the FSA’s view, the Bond contracts were deliberately undertaken by Micalizzi to create artificial gains for the Fund. The mechanism for this deception was simple: units of the Bond were sold to the Fund at a deep discount to their face value, and then valued by the Fund at approximately their face value when reporting to investors.
The FSA believes that Micalizzi used this mechanism to book purported profits from the Bond Contracts of over USD400 million in late 2008, which counterbalanced the Fund’s losses enabling it to report a modest profit each month. In total, Micalizzi used at least USD 7.5 million of the Fund´s (and therefore investors´) money in relation to the Bond contracts, despite knowing that the Bond was not a legitimate financial instrument.
Despite the losses suffered by the Fund, Micalizzi continued to seek new investors. It is the FSA’s view that by providing false and misleading information he deliberately concealed the true value of the Fund from one new investor who subsequently invested USD 41.8 million on 1 December 2008.
In May 2009 the Fund was placed into liquidation. The Fund’s liquidator estimated that the Fund’s assets on liquidation were worth approximately USD 10 million. To date, no payment has been made to any investor by the liquidator.
In August 2010, Micalizzi was informed that the FSA had opened an investigation into his conduct. The FSA has found that during the course of that investigation Micalizzi repeatedly provided it with false and misleading information.
Tracey McDermott, the FSA’s acting director of enforcement and financial crime, said:
“Those managing investments are in positions of trust and significant responsibility. 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.”
Background:
- The Decision Notices for Alberto Micalizzi and Dynamic Decisions Capital Management Ltd can be found on the FSA website.
- Micalizzi was in breach of Principle 1 of the FSA’s Statement of Principles and Code of Conduct for Approved Persons (APER).
- The FSA concluded that DDCM is failing, or is likely to fail, to satisfy the threshold conditions set out in Schedule 6 to the Financial Services and Markets Act 2000 (FSMA) in that, in the opinion of the FSA, DDCM is not fit and proper as it has failed to ensure that its business is conducted soundly and prudently and in compliance with proper standards in breach of Threshold Condition 5 (Suitability).
- The FSA banned and fined DDCM compliance officer Dr Sandradee Joseph in Nov 2011 in a related case.
- The FSA regulates the financial services industry and has four objectives under the Financial Services and Markets Act 2000: maintaining market confidence; securing the appropriate degree of protection for consumers; fighting financial crime; and contributing to the protection and enhancement of the stability of the UK financial system.
- The FSA will be replaced by the Financial Conduct Authority and Prudential Regulation Authority in 2013. The Financial Services Bill currently undergoing parliamentary scrutiny is expected to receive Royal Assent by the end of 2012.
