Hedge fund boss Alberto Micalizzi has been fined £3m by the Financial Services Authority (FSA) for concealing losses of £250m and lying to investors in late 2008.
The FSA has also banned him from working in financial services, judging him as "not being fit and proper" to do so under their rules.
Mr Micalizzi was chief executive of Dynamic Decisions Capital Management (DDCM), a hedge fund management company based in London.
But the fund was liquidated in May 2009 with £6.3m left, and no payments have been made to investors since then.
The FSA said that Mr Micalizzi hid his hedge fund's losses and lied to investors by creating a bond that was bought by the fund at a low value and then artificially revalued to create a £255m gain.
The watchdog believes that the bond was not a genuine financial instrument but that Mr Micalizzi was aware of this when he entered into the Bond contracts.
In total, Mr Micalizzi used at least £4.7m of the fund investors' money in relation to the bond contracts, despite knowing that the bond was not legitimate.
Despite the losses suffered by the fund, Mr Micalizzi continued to seek new investors.
He deliberately concealed the true value of the fund from a new investor who had invested £26.6m.
Tracey McDermott, the FSA's acting director of enforcement and financial crime, said: "Alberto Micalizzi's conduct fell woefully short of the standards that investors should expect and behaviour like his has no place in the financial services industry."
Mr Micalizzi and DDCM are referring the decision to the FSA's Upper Tribunal, which may overturn it.