A London hedge fund manager accused by the Financial Services Authority of lying to investors about "catastrophic losses" has been fined a record £3m by the watchdog.
Alberto Micalizzi, 43, whose $500m (£318m) Dynamic Decisions hedge fund collapsed in 2009, has also been banned for life from working in regulated financial services.
The FSA alleges that, following more than $390m of losses in Dynamic's fund after the collapse of Lehman Brothers, Mr Micalizzi lied about the deficit and launched a phoney bond to cover its losses.
The bond was launched in 2008 and allowed him to book a profit for the fund of more than $400m.
But the FSA claims the bond was, in regulatory parlance, "not a genuine financial instrument" – and was set up purely to cover up the fund's losses.
Specifically, the FSA claims units of the bond were sold to the loss-making fund at a deep discount, then re-stated at their face value in the fund's accounts, creating a huge artificial profit.
That gave the impression that the fund was healthy, enabling Mr Micalizzi to keep attracting new investors. One put in $41.8m in December 2008. The fund was liquidated five months later and the bonds have proved impossible to sell – effectively worthless, according to Reuters.
Tracey McDermott, the FSA's acting enforcement director, said: "Alberto Micalizzi's conduct fell woefully short of the standards investors should expect and behaviour like this has no place in the financial services industry."
The FSA also said Mr Micalizzi repeatedly provided it with false and misleading information.
He is appealing against the finding and seeking to get it overturned at a tribunal. In a lengthy rebuttal statement condemning the "desperate" regulator, his lawyers said: "The picture painted by the FSA ... is artificial." It said Mr Micalizzi may have himself been the victim of an elaborate fraud.
The FSA originally referred the case to the Serious Fraud Office but the police dropped the probe a few months later, leading the City watchdog to pick it up again to pursue a civil action. One lawyer specialising in such cases said: "This is what happens time and again: the FSA sends cases to the police but they fail to act. The FSA then gets so frustrated that it takes back the case and prosecutes it as a civil matter."
Mr Micalizzi studied at Imperial College, London, where he took a doctorate in finance. He went on to hold a research position at Milan's Bocconi business university. The college said he had "suspended himself" last year.
One researcher who dealt with Mr Micalizzi in 2007 said the "charming and chatty" financier stressed his close links to Imperial College due to the extremely mathematical nature of the fund's strategy. Dynamic Decisions was based near Imperial in South Kensington and the researcher said Mr Micalizzi claimed he and his business partner Dr Nicos Cristofides, an Imperial professor, used the university's powerful computers for its calculations.
Other directors included Michael Nobel, a descendent of the founder of the Nobel Prize. Mr Nobel has said he was not kept abreast of the true situation at the fund.
Reuters found that the Micalizzi bond was actually issued by a company in a trailer park suburb of Phoenix, Arizona, on behalf of a small Australian commodities firm. It was supposedly backed by $10bn worth of diesel from the Russian republic of Bashkortostan.