According to Bloomberg, US prosecutors are conducting a criminal probe into whether hedge funds inflated the value of bonds to enhance the fees they were paid. Sources told the news media outlet that prosecutors want to know whether hedge funds solicited fake price quotes from brokers, which would have let the funds artificially raise the value of illiquid securities in their portfolios.
Just this week, a witness in the residential mortgage-backed securities fraud criminal trial against three ex-Nomura Holdings Inc. traders—they are accused of lying about RMBS prices to clients—stated under oath that he had given a Premium Point Investments LP trader fake quotes. The witness, ex-broker Frank DiNucci Jr., claims that two of the defendants, Michael Gramins and Ross Shapiro, are among the ones that trained him to lie to customers about bond prices. DiNucci, who pleaded guilty to fraud and conspiracy and making misrepresentations,previously worked at Nomura. He also worked at Auriga USA LLC and AOC Securities LLC.
Because certain securities are hard to price, hedge funds depend on brokers and third parties for estimates and quotes to determine how to value debt. Holding artificially inflated securities in the portfolios can allow a hedge fund to tout a better performance and get paid more for performance and management fees. It also allows them to conceal when some holdings do poorly.
Meantime, the criminal securities fraud trial against the ex-Nomura traders continues. They are accused of lying to sellers and buyers about prices so that they could raise their own profit from RMBSs.
The US Securities and Exchange Commission filed its own case against them. The regulator said that they made at last $5M more in revenue for Nomura while the subordinates they trained to lie made another $2M. The SEC contends that because of the RMBS fraud, Shapiro made $13.3M, Gramins made $5.8M, and Tyler Peters made $2.9M.
At The SSEK Partners Group, our residential mortgage-backed securities fraud lawyers represent high net worth individual investors and institutional investors. Contact our RMBS fraud law firm today.
Hedge Funds Are Facing a U.S. Criminal Probe Over Bond Valuations, Bloomberg, May 11, 2017
Nomura Traders Slam Ex-Coworker At RMBS Fraud Trial, Law360< May 8, 2017
Read the SEC Complaint (PDF)