May 29, 2012 / 12:21 PM / 5 years ago

UPDATE 2-UK watchdog fines hedge fund boss $4.7 mln

5 Min Read

* Alberto Micalizzi handed 3 mln pound fine by FSA

* FSA says Micalizzi lied to investors to conceal losses

* Micalizzi says FSA investigation "misguided and uneven"

By Tommy Wilkes

LONDON, May 29 (Reuters) - Britain's Financial Services Authority (FSA) has banned Alberto Micalizzi, whose hedge fund racked up hundreds of millions of dollars of losses in the credit crisis, and handed him a record fine for an individual in a non-market abuse case.

The Italian chief executive of London-based Dynamic Decisions Capital Management was not "fit and proper" to perform any role in regulated financial services, the regulator said on Tuesday.

Micalizzi was fined 3 million pounds ($4.7 million) for failing to ensure his business was run soundly and prudently.

Describing Micalizzi's behaviour as "amongst the most serious it had encountered", the FSA said he lied to investors to conceal "catastrophic losses" of more than $390 million, around 85 percent of the value in the DDCM master fund, in 2008.

A Reuters investigation into Micalizzi's fund, DD Growth Premium, revealed in August that its main investment - $500 million of highly illiquid bonds - had been issued by a company in a trailer-park suburb of Phoenix, whose head was on the run from U.S. authorities.

Reuters also found the bonds he bought were backed by a global network of shell companies that included a Spain-based charity, the International Charitable Christian Fund.

The FSA said Micalizzi was fully aware the bonds were not genuine and therefore had no value.

The watchdog has also cancelled DDCM's permission to conduct regulated financial business and said Micalizzi tried to frustrate its investigation by repeatedly providing false and misleading information.

"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," said Tracey McDermott, the FSA's acting director of enforcement and financial crime.

Lack of Credibility

Micalizzi, a researcher at Milan's Bocconi University, denounced the FSA's investigation as "misguided and uneven" and accused the regulator of ignoring documents which "prove no wrongdoing" in the collapse of his hedge fund.

He also criticised the FSA for announcing his ban and fine before he had the chance to appeal at the Upper Tribunal, pointing to the watchdog's similar actions against Ian Hannam, one of JP Morgan's top dealmakers, who was forced to resign after receiving a fine for passing on inside information.

"This is all indicative of the FSA being an organisation desperate to recover from the lack of credibility resulting from their inability to regulate and prevent the large scandals that hit the City at the critical time of the global financial crisis," Micalizzi said.

Fictitious Bond

Micalizzi, who is also under investigation in Italy for fraud, misled investors about the true position of his fund, the FSA said.

The purchase and resale of a batch of fictitious bonds enabled him to create artificial gains for his fund, the FSA said.

The bond contracts were sold to the fund at a deep discount to face value, but Micalizzi is judged to have revalued the bonds at approximately face value when reporting to investors, booking purported profit of over $400 million in late 2008 to counterbalance the fund's losses, the FSA said.

In one example, after Micalizzi provided false and misleading information to conceal the true value of the fund, a new investor put $41.8 million into it in December 2008.

Micalizzi's fund, which had attracted investors such as RMF, part of Man Group, and a subsidiary of the Ontario Teachers' Pension Plan Board, and whose directors included Michael Nobel, great-grandnephew of the founder of the Nobel Prize, was put into liquidation in spring 2009.

The fund's liquidator estimated the fund's assets on liquidation were worth around $10 million. Investors have not yet received anything from the liquidator, the FSA said.

The FSA said Micalizzi had "demonstrated a total lack of honesty and integrity" and he posed a substantial risk to the FSA's objectives of maintaining confidence in the financial system and protecting consumers.

Jonathan Crook, partner at law firm Eversheds, said the case raised questions about the quality of an earlier probe launched by Britain's Serious Fraud Office, which dropped its criminal investigation into DDCM in 2010 citing a lack of evidence.

"The FSA is not a fraud prosecutor and has therefore taken steps to discipline Micalizzi in accordance with its statutory powers. But it all rather begs the question why Micalizzi was not prosecuted for fraud by the SFO," he said.

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