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Michiel Visser and Oluwole Modupe Fagbulu v The Financial Services Authority – Upper Tribunal (Tax and Chancery Chamber), FS/2010/0001 and FS/2010/0006; Tribunal upholds FSA decision to ban and fine hedge fund CEO and CFO £2.1m for deceiving investors and market abuse – Financial Services Authority Press Release FSA/PN/071/2011 of 15 August 2011
In a recently released judgment, the Upper Tribunal (Tax and Chancery Chamber) upheld the Financial Services Authority’s (FSA) decision to ban and fine hedge fund managers, Michiel Visser and Oluwole Fagbulu (Appellants) for deliberately misleading investors and engaging in market abuse.
Visser, at all material times, was CEO and sole director of Mercurius Capital Management Limited (Mercurius),1 an FSA-authorised company which acted as investment manager for a Cayman Islands-based hedge fund called Mercurius International Fund Limited (Fund). He was approved by the FSA to perform controlled function2 (CF) 1 (director), CF3 (chief executive) and CF27 (investment management).
As CFO of the company, Fagbulu was approved to perform CF10 (compliance oversight) and CF13 (finance). While he had no responsibility for, or involvement in, making investment decisions, he was in charge of preparing much of the information sent to the Fund’s existing and potential investors concerning its performance and holdings.
In 2006, the Fund appointed Fortis Prime Fund Solutions (Fortis) as its administrator. Amongst other things, Fortis was responsible for calculating the Fund’s net asset value (NAV).
The Fund entered liquidation in January 2008. The FSA argued that, in the run up to its collapse, the Appellants acted inappropriately and without integrity, in breach of the Financial Services and Markets Act 2000 (FSMA) and the FSA’s Statements of Principle for Approved Persons (Principles).3 During its demise, the Fund maintained a strong investor base – 20 investors had collectively invested €35 million (€8 million of which was invested during its last three months).
In its Decision Notice of 15 March 2010, the FSA concluded, on the grounds outlined below, that the Appellants had engaged in market manipulation and acted without integrity in breach of Principle 1. The Appellants subsequently referred the matter to the Tribunal which considered the matter afresh.
First, the FSA argued that the Appellants engaged in market abuse, namely market manipulation, in order to bolster the Fund’s NAV by increasing, or seeking to increase, the price of shares in which it had invested – Sandhaven Resources Plc (Sandhaven) and Private Trading Systems Plc (PTS), both of which were admitted to trading on the PLUS market.
Market manipulation is defined4 as behaviour which occurs in relation to qualifying investments admitted to trading on a prescribed market5 and includes behaviour that consists of effecting transactions or orders to trade which:6
- Give, or have the potential to give, a false or misleading impression as to the supply of, or demand for, or as to the price of, one of more qualifying instruments; or
- Secure the price of an investment at an abnormal or artificial level.
In 2007, the Appellants caused the Fund to make a series of small bids for Sandhaven shares, most of which led to purchases, on the day of the Fund’s month-end valuation. The bids were purposely pitched above market price in order to force the price up even higher which, in effect, inflated the Fund’s NAV.7 Using the same strategy Visser, trading by himself, also sought, but failed to increase the price of PTS shares.
The Tribunal held that the Appellants had both engaged in market manipulation. Visser did not deny his culpability and, even if he had, the evidence against him was overwhelming. Fagbulu, on the other hand, sought reliance on the defence set out at section 123(2)(a) FSMA – he believed, on reasonable grounds, that his behaviour did not constitute market abuse. While Visser was said to have inspired and directed the transactions, Fagbulu was, in the Tribunal’s opinion, knowingly involved. Although he did not normally deal in shares, he made some of the relevant bids. Further, evidence shows that he understood very clearly the purpose behind the trades. The Tribunal concluded that Fagbulu, “an obviously intelligent man,”8 willingly engaged in market manipulation.
Secondly, the FSA alleged that the Appellants knowingly and consistently breached a number of investment restrictions designed to limit the risk to which the Fund was exposed, thereby placing the fund in a precarious position.
One of the investment restrictions set out in the Fund’s prospectus stated that the Fund will not invest more than 30 percent of its gross assets in the securities of any one issuer. Yet, there are many instances of this restriction being breached. For example, the Fund’s holding in NT Energy Holding, an unlisted company, exceeded the 30 percent threshold numerous times – at its worst in February 2007 when it represented 43.8 percent of the Fund’s gross assets.
A further restriction was imposed in a side letter between Mercurius and Sal Oppenheim, an investor in the Fund. It provided that the fund would not invest more than 30 percent of its value in unlisted companies. In breach of this restriction, Mercurius invested up to 43.8 percent of its gross assets in NT Energy, an unlisted company. At no time did it notify Sal Oppenheim that the restriction had been breached.
The Tribunal held that these breaches were “neither technical nor insignificant, but deliberate, persistent and foolhardy.”9 While Fagbulu did not make the investment decisions that caused the breaches, the Tribunal stressed that he failed to take remedial action. He was therefore “a willing and active participant with Mr Visser in . . . a systematic concealment of the Fund’s true position.”10
Detrimental & Fictitious Transactions
Thirdly, the FSA argued that the Appellants borrowed money at an extortionate rate of interest and entered into fictitious transactions for the purpose of inflating the Fund’s month-end NAV.
Without a prime broker for almost two months, the Fund was left without finance to fund its trading. It was therefore unable to trade on margin or use the proceeds of unsettled trades to enter into new trades. This posed a significant problem for the Fund as such trades were key to its investment strategy.
To address the Fund’s cash position, the Fund entered into two transactions that Visser later described as emergency bridging loans. The first, of $1.2 million, was at an interest rate equivalent to 144 percent per annum. The second, of $1.98 million, was a rate equivalent to 108 percent. In the FSA’s view, the Fund should have been able to borrow at approximately 6 percent per annum with a prime broker.
Further, in late 2007, the Fund entered into two fictitious transactions. Assets supposedly acquired were used by Fortis when computing the Fund’s NAV at the end of each month, in effect making the Fund’s performance better than it actually was. Neither transaction had any commercial purpose. They were solely intended to deliberately conceal the true state of affairs to existing and potential investors.
Failing to Inform Investors
Fourthly, the FSA argued that the Appellants consistently misled the Fund’s investors and deliberately failed to keep them abreast of important developments. Investors were led to believe that the Fund was performing well when in reality it was in serious difficulty. Had the truth been made known, investors would have been able to withdraw their investments and those who had freshly invested would have been unlikely to have done so.
In the Tribunal’s view, this was a “deliberate and calculated course of concealing facts from investors and of misleading them.”11
The Tribunal concluded that Visser and Fagbulu, with differing degrees of culpability, engaged in market abuse and lacked the requisite integrity to discharge their functions. It therefore upheld the FSA’s decision to fine the Appellants and prohibit them from working in sector.
While the FSA recommended that Visser should be fined £1.7 million, the Regulatory Decisions Committee (RDC) increased this figure to £2 million. Presented with little evidence in mitigation, the Tribunal upheld the RDC’s decision.
A “forceful personality whose demands were difficult to resist,”12 Visser was held to be the mind behind the misconduct. This did not, however, make Fagbulu an unwitting accomplice. He prepared and disseminated much of the misleading information and knowingly assisted Visser in committing market abuse. As an approved person, he was responsible for ensuring compliance with the relevant regulatory requirements. Evidence overwhelmingly shows that he failed. In the Tribunal’s view, those who relentlessly fail to comply with obligations and standards voluntarily assumed as an approved person, who commit market abuse and who breach their position of trust “deserve to forfeit their right to carry on controlled activities and to suffer severe punishment.” 13
Although the Tribunal opined that Fagbulu would have been unlikely to embark on such a course of misconduct had Visser not induced him to so do, it determined that his behaviour merited the RDC-recommended fine of £350,000. However, this was reduced to £100,000 on the basis that anything higher would be likely to cause Fagbulu and his family serious financial hardship.
The Tribunal described Visser’s conduct as the worst it had ever seen. It is therefore fitting that his fine is the highest ever imposed on an individual for such behaviour, disregarding disgorgement. Visser has, however, applied to have the decision set aside.
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