British Regulators Bar Hedge Fund Executive From Industry

Date: Wednesday, November 23, 2011
Author: Mark Scott

British financial regulators on Monday barred a hedge fund compliance officer from working in the country’s financial services industry, in connection with deals resulting from the collapse of Lehman Brothers.

It is the first time that the Financial Services Authority has barred a hedge fund compliance officer for failing to provide sufficient oversight of a firm’s trading activities.

Sandradee Joseph, who worked at Dynamic Decisions Capital Management in London, also was fined £14,000 ($21,900) for not protecting the interests of the hedge fund’s investors. Ms. Joseph agreed to a settlement with the authority, which reduced her initial fine by 30 percent.

Dynamic Decision — founded by Alberto Micalizzi, a finance professor at Bocconi University in Milan who teaches classes in risk management and corporate finance — ran into trouble after the bankruptcy of Lehman Brothers in 2008. In the turbulent markets that came after the investment bank’s collapse, the hedge fund lost 85 percent of its approximately £400 million of assets under management.

To conceal these losses, a senior employee at Dynamic Decisions entered into contracts to buy and resell a bond, the Financial Services Authority said in a statement. The bond was supported by the sale of $10 billion of diesel from the autonomous Russian republic of Bashkortostan.

The employee bought the bond at a discount, but reported the transaction at full value. The financial authority said this activity was fraudulent because the employee had attempted to use the transaction to hide losses from investors.

The firm’s prime broker initially raised concerns about the deal, and later resigned after refusing to authorize payments related to the bond. Investors also grew wary of Dynamic Decisions’s activities, particularly relating to how the bond was originated, why it was not traded on an exchange and whether it was a legitimate deal, the authority said in a statement.

The authority added that Ms. Joseph had been barred from working in Britain’s financial services industry because she did not fulfill her obligations as the firm’s compliance officer by failing to investigate investor concerns.

“Joseph’s failure, as compliance officer, to challenge a colleague, investigate and act on the information she received, resulted in D.D.C.M. and the F.S.A. being unable to take appropriate action,” Tracy McDermott, the authority’s acting director of enforcement and financial crime, said in a statement.

British and Italian authorities are continuing their investigations into Dynamic Decision’s trading practices and its subsequent collapse.