Alberto Micalizzi, who ran Dynamic Decisions Capital Management out of Kensington in London, is fighting the allegations and has referred the case to the upper tribunal that hears financial services cases.
Although the Cayman-domiciled fund was set up to invest in US and European equities and was worth $550m on paper in December 2008, it had only $10m in assets when it was placed in liquidation in May 2009, the Financial Services Authority said.
The watchdog said Mr Micalizzi, who also worked as a researcher at Milan’s Bocconi University, repeatedly lied to investors about losses suffered in market turmoil in late 2008. Rather than admit that the fund had lost 85 per cent of its value, the FSA said, he concealed the losses with a series of transactions involving a bond allegedly convertible into diesel fuel.
In a statement, Mr Micalizzi called the FSA’s investigation “misguided and uneven” and accused the regulator of ignoring documents that pointed to his innocence. He said the FSA had failed to understand the role and responsibilities of the fund’s directors and service providers.
Mr Micalizzi’s publicly declared investment strategy was to use options to bet that one of a pair of companies would gain value while the other would lose value, something he called growth premium analysis.
But the strategy ran into trouble after the collapse of Lehman Brothers in September 2008 and the fund had lost 85 per cent of its value by year end 2008. Yet Mr Micalizzi wrote to his investors that the funds “enjoyed continued success” and convinced one of them to put in nearly $42m in early 2009.
Essentially Mr Micalizzi bought units of the bond at a deep discount from an Australian company with no known commodities experience and then booked paper profits of more than $400m, the FSA said.
The FSA said Mr Micalizzi had “repeatedly provided false and misleading information” during the investigation and it denied his request for a penalty reduction due to financial hardship. He has been suspended from his university post.
“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,” said Tracey McDermott, acting FSA enforcement director.
The fund’s compliance director, Sandradee Joseph, was fined £14,000 last year for failing to investigate concerns raised by the fund’s investors before the collapse.
The UK’s Serious Fraud Office briefly investigated the fund but dropped the case after saying it had found insufficient evidence of criminal wrongdoing to bring a case. The SFO has drawn heavy criticism in recent months for its case selection – both for failing to follow up on fraud referrals and for proceeding with some cases despite staff misgivings.