A hedge fund that was sued by a trader for refusing to pay a performance-related bonus, despite him making 97 per cent of its revenue, has been ordered to pay him $5.4mn plus interest by the High Court in London.
Robert Gagliardi sued his former employer, Evolution Capital Management, in London, alleging that it acted in bad faith by denying him a $7.5mn discretionary bonus after he had generated more than $60mn for the firm between April 2021 and March 2022.
The bonus will bring Gagliardi’s total pay for his brief stint at the fund to more than $12mn. He was already paid $7mn by Evolution, including a $625,000 signing bonus, a base salary of about $425,000 and a $6mn “new issue bonus” for successfully trading initial public offerings.
Gagliardi, a block trading specialist nicknamed “Gags”, alleged that he was told in early 2021 that a return of $10mn over the rest of the year would be an “excellent result”. When Gagliardi asked the fund’s founder Michael Lerch for the payout in 2022, he responded: “I’m not going to pay you the bonus, fuck you, sue me.”
Although Evolution did not dispute his extraordinary returns, the fund argued that the damage done to its reputation as a result of dealing with a US Securities and Exchange Commission probe into some of Gagliardi’s trades at his previous employer outweighed his performance, and that the bonus did not need to be paid because it was discretionary.
“There is no question that Mr Gagliardi made exceptional profit for the funds and Mr Lerch frequently praised his performance in that respect,” Mr Justice Calver said in his judgment. “Had [Evolution] properly performed the contract, Mr Gagliardi would have received a discretionary bonus of US$5,385,000.” The judge also said that Gagliardi was Lerch’s “prize asset” at Evolution.
Seth Redniss, Gagliardi’s lawyer, called the ruling a “decisive vindication”.
The trades of the former Segantii Capital Management employee came under scrutiny during a wide-ranging US probe into Morgan Stanley that coincided with his employment at Evolution. During the investigation, Gagliardi had his phone confiscated by US officials and frequently fell out with colleagues, the High Court was told.
The hedge fund said the fact that Gagliardi’s trades had been scrutinised in the investigation that led to the Wall Street bank paying $249mn to settle last year was a factor in its decision not to pay the bonus. In particular, it pointed to his relationship to the former head of Morgan Stanley’s US equity syndicate, Pawan Passi.
In its original filing, Evolution — which countersued Gagliardi for the $7mn it paid him while working there — said the “inappropriate” relationship between the two amounted to a breach of trust.
The hedge fund gave him notice that it was terminating his contract in late February 2022. Gagliardi reiterated throughout the trial that he had been cleared of any wrongdoing by the SEC.
While Gagliardi faced intensive questioning in court over whether he had deliberately lost a mobile phone, the judge wrote in his judgment that he did not consider the trader’s evidence to be “dishonestly given”, adding that he remained “impressively calm” throughout his testimony.
Gagliardi also told the court that the subpoena he was served while employed by Evolution also listed some of “the biggest names” in equity capital markets, and that he “would have probably been insulted” if not included in the document.
Scrutinising his trading history, Paul Downes KC, representing Evolution, referenced several news stories, one of which described Gagliardi’s trading activity as being conducted in a “grey area”. Gagliardi dismissed their relevance, stating that “these are just journalists” and their job involved oversimplifications “like when I explain it to my mum in Queens”.
In its original filings and throughout the trial, Evolution described Gagliardi as an “abrasive” employee who breached risk limits on several occasions. Evolution argued that this was another reason it was able to deny his bonus, although it did not dismiss him at the time of the alleged offences.
In written arguments prepared for the High Court trial that concluded in October, Gagliardi’s lawyers said that, following several disagreements, he asked Lerch if he could be made co-chief investment officer in September 2021.
When his request was denied, Zoltan Varga, a former executive at hedge fund Och-Ziff Capital Management and “a key investor” in Evolution, asked Lerch whether he could offer Gagliardi another title. Lerch proposed his own title for Gagliardi: “Fuck face”.
Gagliardi also claimed that a month later, when Lerch was discussing with colleagues the possibility of the equity capital markets trader leaving Evolution, he commented that if he did, he “would learn the meaning of discretionary very fast”, referring to the disputed discretionary bonus.
Alongside Morgan Stanley’s settlement with the SEC, Passi admitted to misconduct for leaking confidential information to investors and was issued a $250,000 penalty. The authorities did not name or announce any actions against recipients of the information.
Evolution did not immediately respond to a request for comment.
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