FSA bans hedge fund manager over $500m bond scandal

Alberto Micalizzi fined £3m by Financial Services Authority for ‘concealing losses’ of £249m from fund

A hedge fund manager embroiled in a $500m (£319m) international bond scandal has been banned by the City regulator and given a £3m fine.

Alberto Micalizzi is accused of trying to conceal “catastrophic losses” of more than $390m – 85% of his hedge fund Dynamic Decisions Capital Management (DDCM) – following the collapse of Lehman Brothers in 2008.

After the crash, Micalizzi moved most of the fund’s assets into a $500m bond, which the FSA has branded fraudulent. The regulator believes Micalizzi knew the bond was a scam, but bought it to create artificial gains for the fund. Micalizzi and DDCM are appealing against the decision.

The case centres on the mysterious $500m bond. A Reuters investigation last year found that it had been issued by a company in a trailer-park suburb of Phoenix, Arizona, whose chief executive was on the run from the US authorities.

The bond supposedly gave the holder rights to the proceeds of up to $10bn of diesel from the autonomous Russian republic of Bashkortostan in the Ural mountains.

Highly illiquid and of dubious provenance, the bonds were impossible to sell and DDCM was liquidated in spring 2009. It left behind a host of high-profile investors – including a subsidiary of the Ontario Teachers’ Pension Plan Board and RMF, a part of hedge fund Man Group.

Micalizzi, 44, has a PhD in finance from Imperial College, London, and lectures on economics at the respected Bocconi University in Milan. But his research into the “valuation of investments in conditions of uncertainty” appears to have failed him when faced with a $500m bond offering rights over $10bn worth of oil.

In representations to the FSA, Micalizzi said he did not consider the possibility the bond may not have been genuine or as valuable as he believed. He added that he may have been exploited by others due to his lack of experience.

The FSA countered that “the premise and structure of the bond, as well as the purported profits, were obviously implausible” and that related documentation looked fake.

It said Micalizzi used the bond to inflate the fund’s returns and cover his losses from the credit crunch. “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.”

Micalizzi has hit back at the regulator for “demonising” him and pursuing a “misguided and uneven investigation”, highlighting the fact that the Serious Fraud Office had dropped the case for lack of evidence.

He said he has “no possibility of paying any fine” and has submitted a declaration of financial hardship to the FSA. The regulator has in the past made individuals bankrupt in order to pursue a fine.

Micalizzi said the regulator also failed to interview a list of people he recommended several times, including directors of the fund and the fund administrator. “This confirms my view that they did an internal exercise to collage various items in order to come to the point of painting myself as a dishonest person.”

He added that the FSA did not understand the extent of shared decision-making among the fund’s directors – which included Michael Nobel, great-grandnephew of the founder of the Nobel Prize; and said the regulator ignored the professional responsibilities of lawyers, accountants, auditors and consultants associated with the fund.

Last year, the FSA banned DDCM’s compliance officer Sandradee Joseph for failing to act with “due skill and care”. In that decision notice, it noted that various investors had raised concerns about the bond and DDCM’s prime broker had resigned as a result of its concerns.

The FSA said on Tuesday that Micalizzi had demonstrated “a total lack of honesty and integrity, such that he poses a substantial risk to the FSA’s statutory objectives of maintaining confidence in the financial system and securing the appropriate degree of protection for consumers”.

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