UK Regulator Slaps Fund Manager With Biggest Fine Ever

The UK's Financial Services Authority yesterday issued the largest ever fine to an individual for market abuse and other offenses, imposing a penalty of 2 million pounds ($3.3 million) on Dutch hedge fund manager Michiel Visser.

Sharon Lorimer

The company's CFO, Oluwole Fagbulu, was also fined 100,000 pounds ($163,162) for failures of oversight.

Visser was chief executive of Cayman Island-registered Mercurius Capital Management, whose 35 million euro ($50 million) Mecurius International Fund ran fundamental, momentum and event-driven strategies. Visser, who launched the company in 2002 after holding senior positions at ABN Amro Asset management, ran the latter component, according to documents released by the independent tribunal hearing the case.

By summer 2006, the fund was not performing well. In March of that year, Mercurius had invested 3 million pounds ($4.9 million) in an unlisted oil explorer called NT Energy, which, according to the tribunal,"set the scene" for the rapid deterioration of its performance.

Among the stated restrictions in its portfolio, Mercurius was not allowed to have more than 30 percent of its investments in a single security, except government bonds. Over the next 10 months, Visser's firm kept buying into NT Energy, until, by February 2007, nearly 44 percent of the fund was in the company's stock, concentrating its holdings in a single illiquid asset.

In August 2006, one of Mercurius' investors, Sal Oppenheim, the German bank, asked for other exceptions through a "side letter" from its manager, Attica Capital, including a restriction on investing more than 30 percent of the fund's value in securities not listed on recognized exchanges. According to tribunal documents, Visser signed this side letter and had Fagbulu return it to Attica.

Between November and December 2006, Sal Oppenheim invested almost 825,000 euros ($1.18 million) in Mercurius. At no point, the tribunal said, did Visser or Fagbulu inform their investor that the conditions of that side letter had been breached. The FSA alleged that the fund wilfully concealed its buying intentions in order to secure capital from the German bank.

On January 24 the following year, BNP Paribas , the fund's prime broker, gave Mercurius notice that it would be terminating their relationship, putting Visser in an immediate funding crisis. The lack of a prime broker meant that the fund could not make margin trades. Given its lack of capital and poor performance, it was increasingly reliant on this form of trading, the FSA alleged.

To solve its liquidity crisis while it searched for a new prime broker, the FSA said, the fund then undertook two fictitious transactions, which the regulator says were secured loans at exorbitant interest rates, disguised as share sales.

Mercurius' position worsened. It found a new prime broker – Citi Prime Services, part of Citigroup – in March 2007, but the firm also ended that relationship six months later.

The NT Energy play had been in anticipation of an initial public offering by the explorer in September 2006. However, the company delayed its IPO, seeking to raise capital elsewhere. Despite this, Visser continued to invest first in NT, then, after a share swap deal, in Sandhaven, a PLUS-markets listed company that had invested in NT Energy.

In summer 2007, the FSA alleged, Visser and Fagbulu conspired to drive up the value first of Sandhaven shares, then of shares in another holding, Private Trading Systems (PTSP), in order to inflate the falling net asset value (NAV) of the fund.

In May and June, on the days of the fund's month-end valuations, the men made a series of small bids for Sandhaven shares, "deliberately pitched well above the market price, with the aim of forcing it up," according to the FSA. On both days, the tactic worked.

In May, while Fagbulu was making a series of bids for Sandhaven shares through Winterflood Securities, Visser was doing the same through Amstel Securities, a Dutch broker. By pushing up the value of Sandhaven, the fund managed to add 1.125 million pounds ($1.84 milion) to its NAV, reporting a gross performance of more than 5 percent for the month. Without the manipulation, according to the FSA, it would have been down 0.3 percent.

On 28 June 2007, according to tribunal documents, it became even more clear the extent to which the fund's exposure to Sandhaven was hurting its performance. By that day, Sandhaven shares had slipped back to 142p per share, down from the 155p per share that they had closed at after Mercurius' actions at the end of May. If calculated on June 28, the fund's NAV would have shown losses of 10 million euros ($14.39 million).

Visser and Fagbulu replicated their pattern of trading from May, again pushing up the value of their portfolio and registering gross performance of 3.4 percent where otherwise they would have shown losses, UK regulators allege.

Transcripts of Visser's conversations with his broker, in May and June, and again in September when he made a third attempt to artificially inflate the NAV of the fund, show that he was concerned with the closing price of the stock, and nothing else, according to tribunal documents.

The FSA also alleges that Visser tried the same trick with shares in PTSP in September, but failed to have any impact.

The tribunal's papers show that into the latter part of 2007, the fund tried a number of other strategies to improve its NAV, but it collapsed in January 2008.

Throughout, the FSA said, Visser concealed from his fellow directors and from his investors the fund's issues, including the resignation of its prime brokers.

So effective was the concealment that the fund continued to raise capital from investors, the tribunal noted.

Visser did not attend the tribunal, having returned to Holland. He told the court that he was ill.

Tracey McDermott, acting director of enforcement and financial crime at the FSA, said in a statement, "Visser and Fagbulu’s 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."

Both men are now barred from holding roles in regulated financial services.

Visser disputed some elements of the tribunal's case, and has applied to have the judgment set aside.