Tuesday, August 23, 2011

UK Tribunal Upholds FSA Decision to Ban Hedge Fund Managers for Deceiving Investors and Market Abuse

A UK court, reviewing a Financial Services Authority decision, said that a hedge fund management company’s officers deliberately concealed the deterioration in the fund’s performance from the investors, so that existing investors did not withdraw their investments, and new investors put in money. The Upper Tribunal found that both the CEO and CFO of the hedge fund manager embarked on a deliberate and calculated course of concealing facts from investors and of misleading them. They have, albeit with differing degrees of culpability, engaged in a prolonged deceit of the hedge fund’s investors.

Tracey McDermott, Acting Director of Enforcement and Financial crime said that the conduct fell woefully short of the standards required of approved persons. They showed a flagrant disregard for the interests of their investors and over a considerable period engaged in a sustained and deliberate course of deception to present a picture of the fund’s performance that was entirely false

Where disagreements arise between the FSA and firms or individuals about the FSA’s regulatory decisions, the matter can be referred to the Upper Tribunal, which is an independent judicial body established by the Tribunals, Courts and Enforcement Act of 2007.

The Tribunal emphasized that there is a considerable public interest in its being clearly and widely understood that those who apply for FSA approval to carry on controlled activities take on a serious responsibility, and cannot shelter behind claims of ignorance or inexperience, when they fail to meet the obligations and standards which approval carries with it. There can be no possible room for doubt that the two did not act with an appropriate degree of integrity, said the Tribunal.

The Tribunal agreed with the FSA that those who fail, as in this case persistently and in several different ways, to comply with the obligations they have voluntarily assumed as approved persons, who engage in market manipulation, who breach the trust reposed in them by investors, and who systematically deceive those same investors, deserve to forfeit their right to carry on controlled activities and to suffer severe punishment.

Those are not, and are not intended to be, alternatives, said the Tribunal, the first is designed to protect the public, the second to mark disapproval of the person’s conduct and to deter others from similar actions.

It follows from the conclusions reached about their conduct that the actors both failed, persistently and repeatedly, to respect not only the requirements of the Prospectus, but also the requirements of the Authority’s Handbook. The Tribunal concluded that neither of them is fit to work in any capacity within the financial services industry.