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
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
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
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
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.