The Financial Services Authority has for the first time ever barred a compliance officer from working in the financial services industry.
The UK's securities watchdog says that Sandradee Joseph, a compliance officer for Dynamic Decisions Capital Management in London, did not protect the interests of hedge fund investors. Joseph was also fined $22,000 for not acting on concerns raised by investors and the hedge fund's broker about an investment made by a senior employee which the FSA says was of "doubtful governance and legitimacy."
According to the FSA, in late 2008 a senior employee at DDCM entered into a number of contracts to buy and resell a bond. The employee, says the regulator, bought the bond at a discount but reported the transaction at full value. The FSA says the transaction was fraudulent because the employee in question used the transaction to hide financial losses from investors. Those losses amounted to about 85 percent of the firm's total assets of 400 million British pound sterling ($625.8 million) after the bankruptcy of Lehman Brothers in September 2008.
The firm's prime broker did raise concerns about the deal and later resigned over it. Investors, says the FSA, also questioned the transaction. "The risk taken in the fund is beyond the guidelines that you signed up to and the documentation that has been provided around the bond is far from complete," wrote one investor in a memo to DDCM's employee and Joseph. "We therefore find ourselves in a position where we are unable to assess the risk of these trades." The FSA identified the investor as Investor A.
Yet another investor, the FSA identified as Investor B, said that after reviewing documentation about the bond in question it was still concerned about the risks involved. In fact, Investor B carried out its own investigation of the bond and discovered that it was issued through a "special purpose" company and not listed, quoted or traded on a public market.
"Joseph's failure as a compliance officer, to challenge a colleague, investigate and act on the information she received resulted in DDCM and the FSA being unable to take appropriate action," says Tracy McDermott, the authority's acting director of enforcement and financial crime in a statement. "Joseph took far too narrow a view of her role as a compliance officer. She failed to understand the importance of her role and the wider regulatory obligations it brings."
Instead of taking action, says the FSA, Joseph relied on another employee of DDCM and believed that external attorneys were informed of the deal and would have taken action if it were inappropriate.
When asked why she didn't investigate the clear warning signs in advance, Joseph argued that she only had an administrative "reporting function" and compliance was an "individual responsibility" for each employee. No one person was collectively responsible. In addition, she had "no responsibility" for the fund as a lawyer nor did she have any responsibility to understand the bond's structure.
Dynamic Decisions' main hedge fund was liquidated in 2009 by court appointed administrators in the Cayman Islands.
The fund was founded in 2005 by Alberto Micalizzi, a finance professor at Bocconi University in Milan.
-- This article first appeared on Securities Technology Monitor.