Morning Coffee: Ex-Citi MD may regret failing to closely read the emails from his team. The kindest and nicest hedge fund on the Street
As investment bankers often mutter when there’s blame to be assigned for something, the naval custom is that it’s the captain that’s meant to go down with the ship, not the second mate and definitely not the cabin-boy. In the nightmarish ongoing legacy of the Citi Hong Kong high-touch equity sales desk, though, it seems that the regulators are determined that this boat is going down with all hands. The latest casualty is Richard Heyes, who left Citi in 2020, but has now been given a five-year ban from the industry (he had been appealing the decision, and he’s actually retired anyway).
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Heyes was in fact the executive who was given the job of firing the rest of the team, when he was Citi’s Asia-Pacific head of equities. The scandal was quite a basic one – in an effort to increase market share in the “Citi 10” large-cap stocks, the Hong Kong sales desk had got into the habit of sending bogus “indications of interest” or IOIs to clients. These were messages suggesting that another investor was interested in buying or selling a block of stock, when the counterparty was actually Citi itself.
Spoofing IOIs like this is the sort of practice that used to be regarded as “naughty” rather than “harmful” in the olden days, and the complaints concerning Citi relate to a period between 2008 and 2019. Fundamentally, any transaction takes place between a willing buyer and willing seller, at the current fair market price. But investors tend not to like it when they find out that there is no “real” seller and that they’ve just carried out another trade with a bank.
Accordingly, complaints from these investors started flooding in to Citigroup in the 2010s. The Hong Kong Securities & Futures Commission says lots of them ended up being emailed to Richard Heyes, but that he "failed to take note of the relevant emails" and so the traders' misconduct continued.
As we noted above, Heyes had been appealing the decision, and we haven't been able to speak to him to get his side of the story. There have been lots of cases in which people who were fired over the Hong Kong IOI scandal have subsequently won unfair dismissal lawsuits.
Unfortunately, though, those successful cases have partly involved convincing the ex-Citi people persuading a court that they were responding to incentives set at higher levels of management, in the context of a trading desk that clearly had some problems with its culture and compliance training. At the end of last year Philip Shaw, the head of Pan-Asia execution, said (in the context of his own ten-year ban) that “You have to question why top management and compliance has not been held accountable”.
Citi, for its part, devoutly wishes that this legacy issue would go into the dustbin of history and stay there. As Tom Miller, a risk analytics consultant, put it, “everything at this point is lessons learned”. And the lessons include things like not ignoring customer complaints, but more importantly, not assuming that someone else is going to take the eventual fall.
In a statement, the bank said: “This relates to historic conduct. Citi has implemented significant remedial measures to strengthen our compliance and internal controls to address this legacy issue from 2019. We have also invested in key talent and this is reflected in our position in Hong Kong equities and we thank clients for their continued trust in Citi." “This relates to historic conduct. Citi has implemented significant remedial measures to strengthen our compliance and internal controls
Elsewhere, you can tell when a hedge fund is doing really well, because the founders and CEOs start talking about how great their people are. Right now, it’s Dmitry Balyasny giving the avuncular smiles and being supported with anecdotes of yoga, book recommendations and “positive reinforcement”. Balyasny Asset Management's collegiate atmosphere has even apparently even helped them to “win recruiting situations with less money”.
Of course, people who were around at Balyasny in 2018, when 20% of the staff were cut, might question how deep this commitment really goes; even the kindest and gentlest multistrategy firms still have risk management policies. And although Balyasny tries to make allowances for market conditions, and to provide help to underperforming teams, “if after 18 months we look at it and it’s like, well, all these things are a disaster and they’re not taking feedback and they’re really stubborn, we will make a change”.
As Dmitry says, “People issues tend to be a lot more difficult and time-consuming to solve than market issues”.
Meanwhile …
One of the perks of working at a hedge fund (and one of the ways to really build wealth) is that you are often allowed to invest in the funds on favourable terms. For some reason, some Singapore-based employees at Qube, the quant-oriented multistrat, have lost this benefit and been moved into a share class that pays the same performance fees as other investors. This happens elsewhere too but perhaps there’s a tax or regulatory angle? (Bloomberg)
Big US banks seem to be getting nervous about the crypto industry potentially having more influence in Washington DC than they do. The Financial Services Forum, the main banking lobby group, has replaced its president and CEO with a former JPMorgan executive who Jane Fraser regards as more aggressive. (Semafor)
Sara Naison-Tarajano, the global head of private wealth management capital markets and a partner at Goldman Sachs, has a fantastic origin story – in the 5th grade, a rival basketball team refused to play against her because she was a girl, but her teammates wouldn’t let her be sidelined. (Business Insider)
As a byproduct of the need to buy foreign assets to stop its currency from appreciating, the Swiss National Bank is now a significantly bigger investor in US tech stocks than many of the largest fund management firms. (FT)
Fadi Abuali, the MENA regional co-CEO for Goldman Sachs (and a long term colleague and lieutenant of Marc Nachmann) is leaving the bank after 28 years. (Bloomberg)
Daniel Nilsson from Morgan Stanley, has gone to William Blair to be a managing director in its financial sponsors group in Stockholm. Well, they say “group” but actually he’s the only employee in Sweden at the moment. (Financial News)
Robert Plant once interviewed for a traineeship at an accountancy firm; although he later achieved success with Led Zeppelin, he must regret the exciting career in financial services he might have had. (WSJ)
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