Fraud cases do more good than harm to the industry’s reputation

Fri Jun 22, 2012


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These two legal and regulatory decisions should give comfort to anyone with an interest in the long-term health and reputation of the industry


By Nick Evans

May was not a great moment for the perception of the hedge fund industry in Europe, for reasons other than performance too. In the space of two days came news of regulatory and legal judgments in relation to what appear to have been two of the most clear-cut and egregious frauds ever conducted by hedge fund managers in London.

One is Dynamic Decisions, whose manager - an Italian university finance professor - seems to have completely lost the plot. The other is Weavering, whose principal's main approach to compliance seems to have been to surround himself with compliant family members.

Both men continue to protest their innocence. But the judgments against them are damning - and rightly so, assuming (as seems pretty transparent from the decisions) that the cases constitute as clear examples of misconduct, dishonesty and abuse as one is likely to see.

In the case of Dynamic Decisions, the FSA is seeking to fine Alberto Micalizzi £3 million - the largest fine ever sought by the UK regulator in relation to a non-market abuse case - and impose a lifetime ban.

In the case of Weavering, CEO Magnus Peterson and his co-defendants are facing damages of £450 million from the UK High Court decision - while the fund's directors (Peterson's brother and stepfather) have already received earlier damages awards against them in a Cayman court of $111 million each.

Given the robust record of the European hedge fund industry thus far in having been almost entirely fraud-free - certainly in comparison with the US, where the weekly SEC charge sheets at times read like a cops and robbers show - it is clearly a dent to its reputation that two such apparently clear frauds should be making the news at the same time.

And it may well serve to exacerbate negative perceptions of the industry in the short term at least - despite the fact that they are the only two substantive hedge fund frauds in Europe in the past decade.

But, far from doing long-term reputational damage, it should actually be seen as a very positive thing. If both managers were as guilty of wrong-doing as the regulators and legislators have decided, then it is clearly right a) that they have been brought to book, and b) that they have received such stiff and public punishments.

Both cases do also raise some awkward questions about the role and duties performed by administrators, prime brokers, auditors and other service providers - to say nothing about the due diligence done by the unfortunate investors themselves and their advisors.

But the simple fact is that fraud is bound to occur in any industry from time to time - and that it is very difficult to detect. All that one can hope for is that fraudsters receive their due punishment when they are caught out - and that the severity of the treatment serves as a major deterrent against other would-be miscreants.

Which is why it is simply bewildering that in both cases the UK's Serious Fraud Office has so far opted not to pursue criminal investigations. Fines, damages and bans are all very well. But fraudsters need to end up in prison - and it does nothing for London's reputation that the UK's crown prosecution service apparently feels unable to bring criminal fraud charges in the financial world, even in cases that would appear to be as open-and-shut as these.

The SFO's stance is shameful. That aside, though, these two legal and regulatory decisions should give comfort to anyone with an interest in the long-term health and reputation of the industry. Unpopular though regulation may be, they send a clear signal that the hedge fund industry is not unregulated - as many people outside the industry often disingenuously like to make out.

Far from it. These judgments show that there is effective oversight, that the industry is regulated as fully as any other area of the financial industry, that abuses are appropriately punished and that investors can expect some degree of recompense - although they can never expect total protection against fraud ever happening.

One can only hope that there are not too many other Micalizzis or Petersons out there. But if there are others - as there may be - one must have faith that they will be caught and that their misdeeds will be properly and publicly punished. So two cheers for the FSA and the High Court at least - although the SFO so far deserves only a resounding jeer.