A recent decision of the Upper Tribunal illustrates the appropriate due diligence that a fund manager would be expected to undertake when considering an investment. Companies outside the regulated sector may find the guidance on transaction “red flags” has relevance to due diligence exercises conducted by them, too.

Mr Micalizzi was the CEO of Dynamic Decisions Capital Management Limited (DDCM), the manager of the DD Growth Premium Master Fund (the Fund). The Fund was marketed by DDCM as having a low risk, highly liquid, market neutral strategy.

The Fund sustained catastrophic losses in the final quarter of 2008. At Mr Micalizzi’s instigation, during the latter three months of 2008, the Fund acquired units with a face value of USD 700 million in a convertible bond issued by Asseterra Inc (Asseterra), said to be backed by Russian diesel oil worth USD 10 billion (the Bond).

As at 30 September 2008, the Fund’s value was approximately US USD 437 million. The majority of this was lost by investors following the Fund’s collapse into liquidation.

In 2014 the Upper Tribunal upheld the decision of the Financial Conduct Authority (the FCA) that Mr Micalizzi failed to act with integrity in carrying out his functions in connection with his role at DDCM.

The Upper Tribunal heard expert evidence as to the appropriate due diligence that a fund manager would have been expected to undertake. It highlighted the following matters.

Red flags”: Special caution should have been exercised by the fund manager because, amongst other things:

  • Russian counterparties were involved. The Upper Tribunal noted that “the high level of corruption in that country is well-documented”.
  • The owner of the asset by which the Bond was purported to be collateralised provided yahoo and g-mail email addresses in Spain, which the Upper Tribunal commented “is atypical of a large business”.
  • No website urls appeared on the headed paper of a number of the parties, which the Upper Tribunal commented “is odd, given that most reputable companies have websites to describe their businesses and provide contact details”.
  • No final, dated, offering document for the Bond was provided.
  • The seller of the Bond was also its guarantor, creating a substantial conflict of interest.
  • The guarantor did not at the time have any operations.


The fund manager should have performed detailed due diligence and analysis to satisfy himself as to the Bond’s value, a process which, in the circumstances of this case, could have taken weeks. If the fund manager was not experienced in the relevant security, it would be expected to seek specialist advice.

The Upper Tribunal concluded that Mr Micalizzi had been reckless as to whether the Bond was genuine or not and that he willfully disregarded the doubts about the genuineness of the Bond that had been raised by third parties. It directed the FCA to impose a penalty on Micalizzi of GBP 2.7 million and a full prohibition. Mr Micalizzi applied for permission from the Court of Appeal to appeal the Upper Tribunal’s decision, which was recently denied.