Portfolio Manager Sentenced to Prison In Mismarking Scheme
Mismarking or misquoting securities can defraud market participants and harm the markets. It seems to be a recurring theme in recent weeks. See, e.g., SEC v. Im, Civil Action No. 1:17-cv-03603 (S.D.N.Y. Filed May 15, 2017)(action against Nomura traders for misrepresenting prices for securities). Indeed, in a recent trial before Judge Rakoff in Manhattan, mismarking select securities in a portfolio inflated the NAV by millions of dollars and created a false illusion of liquidity. U.S. v. Lumiere, Case No. 1:16-cr-00483 (S.D.N.Y.). The case ended with a guilty verdict by the jury.
Defendant Stefan Lumiere was a portfolio manager at Visium Asset Management, L.P. The firm managed hedge funds specializing in healthcare-related investments. One fund focused on debt instruments from healthcare companies.
Beginning in mid 2011, and continuing for over two years, Defendant Lumiere and others participated in a scheme to defraud the Fund’s investors by mismarking select securities. The purpose of the scheme was to inflate the management fees and make certain illiquid bonds appear to be liquid to encourage investors to remain in the Fund.
The scheme had two key steps. First, false price quotes were solicited from broker-dealers. To implement this part of the scheme the Defendant and others identified securities in inventory for which they wanted false prices each month. The securities selected were typically relatively illiquid. A list of the securities was prepared along with proposed prices. Discussions would then be conducted with two “friendly” brokers regarding the prices for those securities. The brokers furnished the necessary quotations which were transmitted to Visium’s accounting department. The inflated prices were used to calculate the NAV. This falsely inflated the value of the Fund over time by millions of dollars. It also increased management fees and made the illiquid bonds appear to be more liquid than they were in reality.
Second, Defendant purchased additional quantities of certain securities in which the Fund had an established position at inflated prices. Stated differently, the Fund purchased the shares at prices which were higher than those prevailing in the market. The inflated prices were reported to Visium’s accounting department, falsely inflating the the NAV. Illiquid bonds were given the appearance of liquidity, helping induce investors to remain in the Fund.
Following a six day trial the jury return verdicts of guilty to charges of securities and wire fraud. Judge Rakoff handed down a sentence of 18 months in prison followed by three years of supervised release. See also SEC v. Lumiere, Civil Action No. 1:16-cv-04513 (S.D.N.Y.).