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
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
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
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.