Poor Ravi. He may have escaped a minimum three year prison sentence. He may have had the £1.4m he illegally appropriated covered by the employer he appropriated it from. But he still has the enormous £2.9m FSA fine, and he must now cover this himself.
As a result, Sinha, the former UK boss of JC Flowers and a former FIG banker at Goldman, is facing his second bankruptcy in four years. He will also, the FSA acknowledges, suffer “serious financial hardship.”
How did this come to pass? It looks very much like Sinha got carried away with the popular buyside concept of co-investing in your employer – also known, in hedge fund terms, as buying skin in the game.
Sinha’s salary was reportedly £866k. In addition to this, he received more than £1.3m in bonuses. On top of this, it appears that he took out loans to invest in JC Flowers’ own funds – in the expectation that his levered investment would pay off. When the funds didn’t perform,Raviwas unable to service the loans. And when he couldn’t service the loans, he resorted to fraud.
“He borrowed heavily to finance investments whose performance declined and left him unable to service his debts,” says the FSA.
None of this excuses fraud, but it does highlight the danger of investing money in your employer – particularly on a leveraged basis. It’s something worth bearing in mind, given the EU’s AIFM initiative is quite likely to make employees reinvestment in large funds mandatory.
Jon Terry, a partner in the reward group at PricewaterhouseCoopers points out that co-investment was very common in large US banks in the 1990s and early 2000s. “You typically had to be very senior and you were then able to invest your money in the bank’s own private equity funds,” he says. “These were often levered arrangements, in which the bank would put in $2 for every $1 invested. The employee would then get the returns on $3, whilst bearing losses on only $1. The bank itself would cover losses on its $2 contribution.”
For a while, US banks’ co-investment schemes were very lucrative. But after 2007, they started losing money. Terry says they are now very unusual indeed.
That leaves hedge funds and private equity funds, where it’s still normal to reinvest a significant proportion of your bonus in the fund you work for.
“It’s common for hedge funds to ask their asset managers to put money in,” confirms Peter Hahn, an advisor on stability and remuneration at the Financial Services Authority.
However, as with Ravi, this can go horribly wrong.
“If a hedge fund drops below its high water mark, the clients will often insist that the managers invest some money of their own as a mark of confidence in their own ability,” says David Durham at hedge fund search firm Durham Consultants. “I know a partner who put $17m of his own money into a fund to comfort investors and then it dropped like a stone and he lost it all,” he adds.